SOURCE: AP/ Mary Altaffer

At the second presidential debate, Gov. Mitt Romney continued to avoid giving details of how he would pay for his tax plan, which a new analysis shows would give enormous tax cuts to the wealthiest Americans.

In the second presidential debate on Tuesday, an audience member asked Gov. Mitt Romney how his tax plan would affect her personally. She specifically asked him what he would do to tax provisions such as the home mortgage interest deduction and education credits. As he has done throughout the campaign, the former Massachusetts governor refused to give a straight answer.

In response Gov. Romney floated one idea for how to pay for his $5 trillion in tax cuts—a dollar-cap on itemized deductions. But as a new analysis makes clear, limiting or even eliminating itemized deductions doesn’t come remotely close to paying for his tax plan. And as the new analysis from the Tax Policy Center shows, even with the deduction limit, the richest Americans would still receive enormous tax cuts from Romney’s plan.

Gov. Romney proposes about $5 trillion in tax cuts weighted toward high-income Americans and corporations, but his plan includes no specific proposals on how to pay for it. As previous research by the Tax Policy Center methodically demonstrates, the magnitude of Romney’s cuts, given the details he has outlined, can only be paid for with a significant middle-class tax increase. Gov. Romney denies this, suggesting that if enough tax breaks for high-income Americans are sacrificed—tax breaks that he refuses to identify—his plan can be “revenue neutral” without shifting the tax burden from the rich onto everyone else.

Yet the latest analysis by the economists at the nonpartisan Tax Policy Center shows two important things:

1. Gov. Romney’s itemized deduction idea does not come remotely close to paying for Romney’s tax plan
2. Even with a tight cap on itemized deductions, the richest Americans would receive enormous net tax cuts from Romney’s plan

The upshot is that any way you cut it, Gov. Romney’s tax cuts for the rich and corporations create a massive revenue hole that can only be made up by raising taxes on middle- and low-income Americans. Here are the details.

Romney’s itemized deduction idea does not come remotely close to paying for Romney’s tax plan

Using its tax estimation model, the Tax Policy Center finds that Gov. Romney’s idea to limit itemized deductions to $25,000 raises only $1.27 trillion over 10 years. It also finds that eliminating itemized deductions entirely would only raise $1.96 trillion over 10 years. That’s not nearly enough to offset his approximately $4.8 trillion in tax cuts. Donald Marron, who directs the Tax Policy Center and was George W. Bush’s top economic advisor, summarizes:

Capping itemized deductions at $25,000 would thus produce about one-quarter of the revenue needed to offset Governor Romney’s tax cuts, and completely eliminating them (which he has not suggested) would cover about 40 percent of the revenue needed.

Since Gov. Romney’s only idea for paying for his tax cuts gets only one-quarter of the way there, the question he still must answer is who pays for the remaining three-quarters. (See Figure 1)

Even with a limit on itemized deductions, the richest Americans would receive enormous net tax cuts from Romney’s plan

The new Tax Policy Center analysis shows that limiting or even eliminating itemized deductions can’t possibly offset Gov. Romney’s tax cuts for the rich. It provides further evidence that Gov. Romney’s assertion in the debate that “I am not going to have people at the high end pay less than they’re paying now” was flatly false.

To be sure, the analysis shows that limiting itemized deductions in and of itself is very progressive. The further you go up the income scale, the more that such a limit would raise your taxes as a share of your income, but combining the itemized deduction proposal with everything else he proposes results in a massively regressive tax cut. The richest Americans would receive enormous tax cuts overall from the Romney plan. (see Figures 2, 3, and 4)

Bottom line: Gov. Romney’s tax cuts giveth much more to the rich than any limit on deductions taketh away. Even with a $0 cap on itemized deductions, the net tax cut for the richest Americans is only a little bit smaller.

What’s more, these numbers do not even include the huge windfall that the richest Americans receive from making the Bush-era tax cuts permanent, which Romney supports. (President Barack Obama would let the Bush tax cuts expire for incomes above $200,000 for individuals and $250,000 for couples.) Citizens for Tax Justice finds that if you include the Bush tax cuts, millionaires receive an average tax cut of more than $250,000 from the Romney plan even if all of their tax breaks are eliminated (except those for investments, which Gov. Romney leaves off the table).

The Romney campaign’s dishonest and unsettling response

In a blog post, the Romney campaign offers several responses to Tax Policy Center’s recent analysis, but none hold any water. Here is why they’re wrong:

• Other tax breaks can’t make up the difference. Gov. Romney’s campaign notes that the universe of tax breaks goes beyond itemized deductions so the potential savings from reducing them could be greater. It’s true that itemized deductions are only one form of “tax expenditure” and that there are others. The problem is, Gov. Romney could not possibly get much additional revenue from the other tax breaks without burdening middle- and low-income Americans. That’s because the largest tax breaks for the rich—tax breaks on investments such as capital gains and dividends—are off the table under his parameters. And the other major tax breaks, such as the exclusion for employer-sponsored health insurance and the child tax credit, predominantly or exclusively benefit Americans with incomes under $200,000. The Tax Policy Center’s original analysis considered all tax breaks except those for investment income and others whose elimination would be impractical or extremely politically unrealistic. It tried to make Romney’s tax cut add up in the most progressive way possible but found that the math is impossible without a middle-class tax increase.

• Including corporate tax cuts in the analysis makes Romney’s math harder, not easier. The Romney campaign complains that the Tax Policy Center does not include the potential savings from reducing corporate tax breaks. But the itemized deduction proposal falls far short of paying for Romney’s tax cuts even if you don’t include the more than $1 trillion in corporate tax cuts he has proposed. Moreover, Gov. Romney says the savings from reducing corporate tax breaks will be reserved for even bigger corporate tax cuts in the future. (Don’t believe me? Read this, this, and this, and see page 5 of this.)

• Voodoo economics can’t make Romney’s plan add up. Gov. Romney’s campaign also made the age-old supply-side argument that the tax cuts for the rich would have such positive economic effects that it would pay for itself in significant part. But these claims are unfounded. In fact, the Tax Policy Center examined Gov. Romney’s plan using aggressive growth estimates and it still fell far short of adding up.

• Romney’s “six studies” actually show why his plan doesn’t add up. Gov. Romney continues to use the thoroughly debunked talking point that “six studies” show that his tax math can add up. But these six studies (most of which can’t really be called studies) actually serve to show why his plan doesn’t add up. At least one of the analyses quite clearly documents why the Romney tax plan would at the very least require a tax increase on Americans making between $100,000 and $200,000 a year, which Romney continues to deny.

• Romney’s attack on the nonpartisan Tax Policy Center is shameful and unsettling. The Romney campaign’s blog post calls the Tax Policy Center’s most recent estimates “deceitful” and insinuates that their attempt to inform voters was politically timed. The attack on Tax Policy Center, a nonpartisan and universally respected research organization, is shameful.

The Romney team is showing that its modus operandi is to conceal details of its plans, deny mathematical truths about those plans, and attack the integrity of those who point out those truths in the interests of giving voters an informed choice. This has frightening implications for more than just tax policy.

Seth Hanlon is Director of Fiscal Reform at the Center for American Progress Action Fund.

SOURCE: AP/Kin Cheung

This year, casino magnate Sheldon Adelson will spend $100 million to shape the tax code to his liking through the policies of Republican presidential nominee Gov. Mitt Romney.

Billionaire casino mogul Sheldon Adelson says he plans to spend $100 million this year to get former Massachusetts Gov. Mitt Romney elected president. He has already contributed $36 million to various Republican “super PACs.” That’s a lot of money. But it is far less than the windfall Adelson could reap from Gov. Romney’s tax cuts if he is elected president. Over the course of a four-year presidential administration, Adelson stands to receive a potential tax cut from the Romney tax agenda of more than $2 billion—an exponential return on a $100 million investment.

The magnitude of Adelson’s tax windfall can be estimated from public information about his income and wealth and the profits of his company, Las Vegas Sands Corp. Because public information does not give a complete picture of Adelson’s finances, in particular his annual income, we can estimate only parts of the total tax cut that Romney’s policies would give him. Gov. Romney’s tax plan is also vague in key respects. But based on what we do know, Gov. Romney’s tax policies would:

• Cut top tax rates, saving Adelson approximately $1.5 million on his annual compensation as chief executive of his casino company.
• Maintain the special low rates on dividends, potentially saving Adelson nearly $120 million on a single year’s worth of dividends, more than enough to recoup his political donations.
• Maintain the special low rates on capital gains, allowing Adelson to make back his political donations in capital gains tax cuts just by selling a fraction of his stock.
• Provide a tax windfall of an estimated $1.2 billion to Adelson’s company, Las Vegas Sands Corp., on untaxed profits from its Asian casinos, as well as a tax exemption for future overseas profits. Adelson’s casinos already enjoy a special foreign tax exemption from the Chinese administrative region of Macau, and Gov. Romney would make those foreign profits exempt from U.S. taxes as well.
• Eliminate the estate tax, potentially providing a staggering $8.9 billion windfall to Adelson’s heirs.

At the same time, 95 percent of Americans—those making $200,000 or less—would get a tax increase, on average, from the Romney tax plan.

Below we explore the magnitude of the various tax cuts Adelson stands to receive if Gov. Romney is elected president on November 6.

Executive compensation

Gov. Romney proposes not only to maintain all of the tax cuts enacted by President George W. Bush but also to cut the top individual tax rate from its current 35 percent to 28 percent. The richest Americans have not paid a lower rate since the presidency of Herbert Hoover. President Barack Obama proposes to allow the top rate to revert to 39.6 percent, where it was during the Clinton presidency of the 1990s.

These rates apply to “ordinary” income, including the compensation that Adelson receives as chairman and CEO of Las Vegas Sands. In 2011 Sands paid Adelson $13.8 million for his services, including salary, bonus, and other compensation. (A super-wealthy individual like Adelson undoubtedly has far more income that falls in the “ordinary income” category than that, such as interest income, but only his executive compensation is public information.)

If Adelson’s compensation is the same next year and the Republican presidential nominee wins the presidential election, then Adelson would get a tax cut of about $1.5 million on his executive compensation alone. As we will see, that amount is just pocket change compared to the windfall from Gov. Romney’s other tax proposals.

Dividends

Another element of Gov. Romney’s plan is to maintain the 15 percent tax rate on corporate dividends instituted by President Bush in 2003. President Obama proposes to let the Bush tax cuts on dividends expire, so that dividends are taxed as ordinary income as they were before 2003. The Republican presidential candidate would also repeal a small Medicare tax on the income that high-income households receive from investments, including dividends and capital gains, that was enacted in 2009 to help fund health care reform.

Adelson will reportedly receive about $419 million in dividends from Las Vegas Sands Corp. this year. And the cash-rich company is expected to pay future dividends as well. If Adelson receives the same $419 million dividend next year as he is expected to receive this year, Gov. Romney’s policies would give him a dividend tax cut of $119 million.

In other words, Adelson could easily recoup the $100 million he is spending to elect Gov. Romney to the White House solely from tax cuts on corporate dividends in the first year of a Romney administration.

Capital gains

Gov. Romney would also maintain President Bush’s 15 percent tax rate on capital gains, which is the lowest since the Great Depression. The Bush capital gains rate has not led to higher investment or economic growth as promised. Instead it has deepened income inequality and tax code unfairness. President Obama would allow the capital gains rate for the wealthy to revert to the 20 percent rate that existed at the end of the Clinton presidency.

The capital gains tax windfall for Adelson is difficult to estimate but potentially massive. Adelson and his family own slightly more than half of Las Vegas Sands Corp., which is valued at $33 billion, so his stock holdings can be estimated at $18 billion. His gains on that stock are unknown: There is incomplete public information on what he paid to acquire his stock or subsequently invested in the company. But if we reasonably estimate that he has at least $12 billion in gains on his Las Vegas Sands stock, then the tax savings under Gov. Romney’s plan are as large as $1 billion.

Of course Adelson is unlikely to sell all of that stock (and if he holds all of his stock until he dies, he will never pay capital gains tax on the gain). But given what we have assumed about the amount of his gains, he could more than recoup his $100 million in political contributions just by selling one-tenth of his stock. Adelson could also benefit from Gov. Romney’s plan to maintain the Bush capital gains rates on any investments that he has other than his stake in Las Vegas Sands Corp.

Corporate tax proposals

Gov. Romney’s tax plan would cut the corporate rate by nearly one-third to 25 percent. This rate cut and other Romney corporate tax proposals would cut taxes for corporations by more than $1 trillion over the next decade. Adelson’s Las Vegas Sands Corp. stands to receive billions in tax savings under the Romney tax plan.

Over the past few years, Adelson’s casinos have reported tax losses in the United States, and the company’s reported U.S. tax expense has been negative. Given that it is already not paying U.S. corporate taxes on its domestic profits, it is difficult to estimate how much a corporate rate cut could save the company in the future, so this report does not attempt to put a number on it. But in future years, if the company begins to show positive earnings in the United States (including for tax purposes), it would benefit from Gov. Romney’s corporate rate cut.

The bigger windfall for Adelson’s company would likely be through the Romney proposal on overseas corporate earnings. Adelson’s casino empire now has a bigger presence in Asia than it does in the United States. The company now operates four hotel-casino resorts in Macau (a special administrative region of China) and another in Singapore. At the end of 2011, Las Vegas Sands held $5.6 billion in profits overseas on which it had not paid U.S. corporate taxes.

A large share of these profits has not only avoided U.S. taxes but local taxes as well. In its annual filing, Adelson’s company told investors:

We have had the benefit of a corporate tax exemption in Macao, which exempts us from paying the 12 percent corporate income tax on profits generated by the operation of casino games. We will continue to benefit from this tax exemption through the end of 2013 [and] request a 5-year extension.

This exemption is surely part of the reason that Las Vegas Sands Corp. paid an overall foreign tax rate of only 8.7 percent over the last five years.

Corporations that have stashed profits abroad—and in particular those that have found ways to avoid foreign taxes—stand to receive a giant windfall under the Romney tax plan. Gov. Romney would provide a “tax holiday” for untaxed foreign profits, relieving companies like Las Vegas Sands of ever having to pay more than a nominal tax on them. Las Vegas Sands would receive a windfall tax cut of approximately $1.2 billion on its $5.6 billion in overseas profits from Gov. Romney’s special “holiday” rate on corporate overseas profits. Given that he owns more than half the company, Adelson’s proportionate share of this windfall would be more than $600 million—six times as much as he will spend to get the Republican candidate elected.

Moreover, Gov. Romney’s “territorial tax” proposal would make Las Vegas Sands Corp.’s future overseas profits permanently exempt from U.S. corporate taxes, even as the company pays zero or very low taxes to foreign governments. In 2011 the company earned $2.1 billion in profits overseas. It would ultimately owe about $565 million in U.S. corporate taxes on those profits under current tax rules but zero under the Romney tax plan. Adelson’s share of that would be nearly $300 million—three times what he will spend this year on the 2012 presidential race.

Estate tax

All of these figures are dwarfed by the potential tax windfall that Adelson’s family would receive from Gov. Romney’s estate tax plan. Since 1916 the United States has imposed a tax on large estates in order to raise revenue and “help to preserve a measurable equality of opportunity” in the words of an original proponent, President Theodore Roosevelt. The Romney tax plan would eliminate the estate tax, conferring a colossal windfall on billionaire heirs.

This year, with an exemption of more than $10 million for couples and a 35 percent top rate, only 0.13 percent of estates are subject to the estate tax. President Obama has proposed a middle-ground compromise: an exemption of more than $7 million for couples and a 45 percent top rate. Under President Obama’s plan, only 0.28 percent of estates would pay any estate tax next year, but estates the size of Adelson’s will certainly be among those that do.

Adelson’s net worth is estimated at $19.7 billion. Based on the difference between President Obama’s estate tax proposal and Gov. Romney’s total abolition of the estate tax, Adelson’s heirs could benefit by a staggering $8.9 billion from estate tax cuts if Romney wins—89 times the amount that Adelson is spending to elect Gov. Romney to the White House.

That $8.9 billion could fund Pell Grants for more than 2 million students. It could fund entire federal programs including Head Start early education; the nutrition program for women, infants, and children; cancer research at the National Institutes of Health; or all activities of the National Science Foundation for one year. Or it could help pay down our national debt. Gov. Romney’s plan would choose a multibillion-dollar windfall for Adelson’s heirs over these priorities. (See Table 1 for a complete breakdown of Adelson’s potential return on investment in a Romney presidency.)

One of 32 billionaires

Adelson is not the only super-wealthy individual spending money to elect Gov. Romney to the White House. At least 32 billionaires have opened their wallets for the Romney campaign or pro-Romney “super PACs.”

Like Adelson they would undoubtedly receive giant tax cuts if Gov. Romney is elected and implements his tax plan. The nonpartisan Tax Policy Center calculates that the 0.1 percent richest Americans—those with annual incomes exceeding $2.5 million—would receive an average tax cut of at least $247,000 from Gov. Romney’s plan. For billionaires, as we have seen with Adelson, the windfall could be larger by several orders of magnitude.

A tax cut for Sheldon Adelson and a tax increase for you

By cutting the tax rates paid by the richest Americans on their compensation and investment income, by cutting corporate taxes by $1 trillion, and by eliminating the estate tax, the Romney tax plan would drain huge amounts of revenues from the U.S. Treasury. Yet Gov. Romney also claims that his plan would be “revenue neutral”—meaning that he would hold revenues to the levels generated by our current tax policies. Therefore, the only way his plan adds up is through a massive tax increase on middle-class and low-income Americans.

An analysis of Gov. Romney’s tax plan by the nonpartisan Tax Policy Center, using extremely generous assumptions, found that the plan would increase the tax burden on the 95 percent of Americans with incomes of less than $200,000. Families with children whose incomes are less than $200,000 would see an average tax increase of more than $2,000. All Americans with incomes of less than $200,000 would see an average tax increase of more than $500. Though the Republican presidential candidate’s plan is vague in key respects, the specific tax cuts he has promised to the rich would “mathematically necessitate a shift in the tax burden of at least $86 billion away from high-income taxpayers onto lower- and middle-income taxpayers,” according to the nonpartisan study.

Translation: Sheldon Adelson’s tax cut will be coming out of your pocket.

Conclusion

A 2008 magazine profile of Adelson described how the casino magnate’s political views were formed: “[A]s his wealth grew, he began to favor tax-averse Republican economic policies.” Then the third-richest person in America, Adelson was quoted asking, “Why is it fair that I should be paying a higher percentage of taxes than anyone else?” This year, Adelson will spend $100 million to shape the tax code to his liking through the policies of Republican presidential nominee Gov. Romney. If Romney wins, Adelson and other billionaires will receive giant tax cuts at the expense of most other Americans.

Seth Hanlon is Director of Fiscal Reform at the Center for American Progress Action Fund.

SOURCE: AP/Evan Vucci

Republican presidential candidate and former Massachusetts Gov. Mitt Romney talks with his staff while riding on his bus after a campaign stop in Council Bluffs, Iowa.

New details from the Romney campaign about the Republican presidential candidate’s tax plan reveal not only that middle-class families will shoulder the burden for tax cuts for wealthy individuals but also that they’ll have to pay for about $1 trillion in tax cuts for corporations.

Independent analyses of the former Massachusetts governor’s tax proposals already show that they would inevitably raise middle-class taxes to pay for a massive tax cut for high-income households. Earlier this month, researchers at the nonpartisan Tax Policy Center crunched the numbers behind Gov. Romney’s plan and found that the magnitude of his tax cuts for high-income households would necessitate a tax increase of at least $2,000 on middle-class families, and at least $500 on all taxpayers with incomes under $200,000.

But Gov. Romney had been somewhat vague about how he would pay for corporate tax cuts.  Now, though, the campaign has clarified that none of the cost of his proposal to cut corporate taxes by about $1 trillion would be paid for by eliminating corporate tax breaks or tax loopholes.  That trillion-dollar revenue loss can only be made up by further tax increases on the middle-class. Here are the details.

The Romney tax increase on the middle class

First, some background. Gov. Romney’s tax plan[1] would lower income tax rates for individuals by 20 percent (dropping the top rate from 35 percent to 28 percent) and lower the corporate rate from the current 35 percent to 25 percent. Though these rate cuts and other Romney tax policies would cost nearly $5 trillion over 10 years, Gov. Romney’s advisors continue to claim that his tax plan is “revenue neutral” compared to current tax policies. The campaign says that the lost revenue will be made up by “broadening the tax base” by eliminating tax deductions, credits, and other such tax breaks, and by counting on additional economic growth.

Yet with very few exceptions,[2] Gov. Romney has not specified which tax breaks he would eliminate. And his plan specifically protects the biggest tax breaks for high-income households – the preferential rates on capital gains and dividends.

Earlier this month, economists at the nonpartisan Tax Policy Center took a close look at the hidden part of Gov. Romney’s tax plan—how it could fill the nearly $5 trillion revenue hole by eliminating unspecified tax breaks. The center’s researchers went out of their way to be kind to Gov. Romney, filling in the blanks of his plan to make it as progressive as possible. They assumed, for example, that his plan would eliminate all tax breaks for high-income households before reducing any for middle-income or low-income households. They also assumed that its proposed corporate tax cuts would be fully paid for with reductions in tax breaks for corporations or other businesses.[3]

Even with these very generous assumptions, the nonpartisan Tax Policy Center found that Gov. Romney’s plan does not add up without a significant net tax increase on households earning less than $200,000. The center concluded that in a single year, 2015, his plan would necessitate “a shift in the tax burden of roughly $86 billion from those making over $200,000 to those making less than that amount.” That translates into an average tax increase of about $2,000 for middle-class families and $500 for all taxpayers with incomes under $200,000. Even with 20 percent lower rates, these families would pay higher taxes overall because of the elimination of tax deductions and credits.

Romney campaign says corporate tax breaks are off the table in tax reform

But it gets worse. Last week, the Romney campaign clarified that their corporate tax rate cuts would not be fully paid for by closing corporate tax breaks. In fact, the Romney campaign revealed to the Tax Policy Center that none of the nearly $1 trillion in lost revenue from reducing the corporate rate to 25 percent would be paid for by eliminating corporate tax breaks.[4] The campaign also clarified that another of Gov. Romney’s other corporate tax proposals—a tax “holiday” for overseas corporate profits, which has been estimated to cost $80 billion over 10 years[5]—also would not be paid for by closing corporate tax breaks.

The authors of the Tax Policy Center analysis write in a follow-up report:

Governor Romney’s tax advisors told TPC that the (then, as now, unspecified) cuts in corporate tax preferences were not meant to finance the initial rate cut to 25 percent but instead would pay for a subsequent revenue-neutral set of proposals that would reduce corporate rates further and enact a territorial system.[6]

In other words, Gov. Romney plans to give corporations a $1 trillion tax cut and an $80 billion tax holiday before asking them to sacrifice a single tax break. Any reductions in corporate tax breaks—if they ever happen—would go toward financing a second round of corporate rate cuts.  This second round of tax cuts would reduce corporate rates below 25 percent and enact a “territorial” tax system, which is essentially a permanent holiday for overseas profits. (see Table 1 for a nonexclusive list of tax breaks that would be on the table and off the table under Romney’s proposals for tax reform)

The Romney campaign continues to maintain that their overall tax plan is revenue neutral. So the fact that corporate tax breaks are off the table (reserved for a second round of corporate tax cuts) can only mean one thing: The nearly $1 trillion corporate tax cut and $80 billion holiday has to be paid for with even bigger reductions in tax breaks for individuals.

Under the contours of the Romney plan, the only tax breaks that would be available to pay for this additional $1 trillion are those benefitting individuals and families with incomes under $200,000. That’s because, as the Tax Policy Center found in its original study, entirely eliminating tax breaks benefitting high-income households isn’t even enough to pay for Romney’s tax rate cuts for those households, let alone tax cuts for corporations.

The authors of the report confirm that accounting for Gov. Romney’s unpaid-for corporate tax cuts would necessitate “even larger cuts to tax expenditures [i.e. tax breaks], and correspondingly larger increases in taxes on middle- and/or lower-income taxpayers,” than their original study found.[7]

How big? The original Tax Policy Center study found that in a single year, 2015, Gov. Romney’s plan would shift at least $86 billion of the tax burden from households with incomes over $200,000 to households with incomes below that level. The center estimates that in the same year, Gov. Romney’s unpaid-for corporate tax cuts would cost $96 billion.[8] Therefore, the tax increases on the middle class that the center originally estimated—at least $2,000 for families and $500 for all taxpayers with incomes under $200,000—would likely be around twice as much if Gov. Romney’s unpaid-for corporate tax cuts are taken into account.[9]

But what about the Romney plan’s promised effects on economic growth? As the Tax Policy Center writes in its original report, “the effects of tax rate reductions on the macroeconomy are likely to be small or even negative, at least, over the typical 10-year budget window.”[10] Looking at Gov. Romney’s tax plan for individuals, those researchers found that even under extremely optimistic estimates—using an approach developed by Romney economic advisor Greg Mankiw—Gov. Romney’s tax rate cuts would not come close to paying for themselves: Middle-class families would still get a significant tax increase, albeit a smaller one. Cuts in corporate tax rates are estimated to have a similarly small impact on economic growth—not nearly enough to finance themselves.[11]

The bottom line is this—Gov. Romney’s tax plan raises middle-class families’ taxes to pay for tax cuts for high-income households, and now we know that it will raise middle-class families’ taxes even more to pay for tax cuts for corporations.

Seth Hanlon is Director of Fiscal Reform at the Center for American Progress Action Fund.

Endnotes

SOURCE: AP/David Goldman

Republican presidential candidate and former Massachusetts Gov. Mitt Romney speaks at the Republican presidential candidate debate in Charleston, S.C.

The release of former Gov. Mitt Romney’s tax returns is sure to spark a lot of interest in his personal wealth as well as the strategies he employs to pay a very low tax rate. But the real focus should be on how conservatives are promoting tax policies that allow millionaires like Romney to pay less in income and payroll taxes as a share of their income than most middle-class families.

Gov. Romney’s tax policy proposals would do nothing to address this fundamental imbalance, and would, in fact, skew the code even more in favor of the rich. In the accompanying charts we demonstrate how the average middle-class family fairs today under the current tax system compared to Romney, and how they would fair under his tax plan compared to how he would benefit. The comparisons are telling. (see charts)

How is it possible for Governor Romney’s taxes to be so low compared to families making one-five hundredth as much money? Because he benefits from a variety of special tax preferences that most middle-class families can’t take advantage of. These include:

• Extra-low rate for investment income. Capital gains and dividends are taxed at just 15 percent, compared to a top rate of 35 percent for ordinary income. Most middle-class families earn all or nearly all of their income from wages and salaries, and so get taxed at ordinary rates. In 2010 less than a third of Romney’s income came from ordinary income. On the rest, he paid the special low rate.
• The “carried interest” loophole. Making matters worse (or better, depending on your perspective), Romney gets to claim that millions of dollars in compensation from his work at Bain Capital is actually capital gains rather than ordinary income. So he pays only the extra-low capital gains rate instead of the higher ordinary rate. This is a break available only to the managers of investment partnerships like private equity and hedge fund managers.
• Investment income exempt from payroll taxes. Most middle-class families pay 7.65 percent of their income in payroll taxes that go to support the Social Security and Medicare systems. Their employers pay another 7.65 percent. But investment income isn’t subject to the payroll tax. Because nearly all of Romney’s income came from capital gains or gets to count as capital gains, his payroll tax bill is next to nothing.

Romney wants to preserve all these special tax breaks and then create even more. Romney’s tax policies would save him millions of dollars every year. Here’s why:

• Over the past two years, Romney appears to have personally benefitted by $2.6 million from the carried interest loophole, which Romney wants to preserve. Romney’s campaign said today that he received nearly $13 million in carried interest over 2010 and 2011, reportedly taxed at preferential capital gains rates. Had this income been taxed like regular salaries or wages, he would have paid about $1.5 million more in 2010 and about $2.6 million in total in those two years.

• Based on the information in his 2010 return, we estimate that the Bush tax cuts, including historically low tax rates on capital gains and dividends and lower top marginal rates, saved Romney about $1.6 million in 2010.

• Romney is also proposing additional tax cuts on investment income. Currently, only wages and other labor income are subject to the Medicare tax. But under current law, investment income will be subject to Medicare taxes starting next year. Romney would keep investment income exempt from the Medicare tax. Based on the income from his 2010 tax returns, this would amount to an $800,000 tax cut for Romney.

• President Obama wants to end the Bush tax cuts for millionaires and close the carried interest loophole and other special breaks for the wealthy. As a result, millionaires who enjoy special tax loopholes would pay higher rates. Based on the income from his 2010 return, the difference between President Barack Obama’s plan and Gov. Romney’s plan would save Romney about $3.5 million.

What’s more, Mitt Romney’s tax plan would preserve and expand the special breaks that benefit only the very wealthy, shifting the tax burden toward the middle class. This would happen in at least three ways:

• Romney’s plan preserves every single one of the special breaks described above that allow him and other millionaires to pay lower tax rates than most middle-class families, even those that are set to expire at the end of this year.
• Romney adds new tax breaks for the superwealthy in the form of a huge corporate tax cut and the elimination of the estate tax.
• Romney’s plan increases taxes on many middle-class families. His plan includes the repeal of several tax breaks for middle-class families that were enacted under President Obama. The result is higher taxes for more than 40 percent of families with children making under $100,000 a year.

The upshot: Gov. Romney benefits from a myriad of special breaks that reduce his tax rate to a level below that of a normal middle-class family. Instead of targeting these unfair breaks for reform, Romney’s tax plan actually preserves them and even adds several new ones. Mitt Romney’s tax returns reveal not only how much money he makes and how little taxes he pays, but how broken our tax code really is.

Michael Linden is Director of Tax and Budget Policy and Seth Hanlon is Director of Fiscal Reform at the Center for American Progress Action Fund.

SOURCE: AP/Isaac Brekken

Presidential candidate Newt Gingrich gives a speech in October 2010.

Download the charts (pdf)

Republican presidential candidate Newt Gingrich’s tax plan is so extreme—and so unfair to the middle class—that it’s almost impossible to believe that it comes from a serious presidential candidate from a major political party.

For starters, it would cut taxes for the super-wealthy by so much that the normal adjectives (“dramatically,” “massively,” “enormously”) don’t even apply. At the same time, it would introduce a new level of complexity for many middle-class families who would have to calculate their tax bill twice each year to figure out how much they owe.

But that’s not all. Gingrich would slash the corporate income tax rate down to historically low levels while keeping in place every existing corporate tax loophole and special tax break.

The plan would result in the lowest levels of federal revenue in 70 years and it would lead to perpetual trillion-dollar deficits and an exploding national debt.

What follows is a list of the 10 most shocking, ridiculous, and otherwise-unbelievable aspects of Newt Gingrich’s tax plan—plus one shocking bonus fact at the end.

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Michael Linden is the Director of Tax and Budget Policy and Seth Hanlon is Director of Fiscal Policy at the Center for American Progress Action Fund.

SOURCE: Center for American Progress

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Thank you, Chairman Casey, Vice-Chairman Brady, and the members of the committee for the chance to appear today to discuss tax reform and the economy.

There is wide agreement that the tax code is long overdue for reform. Our current tax code is inefficient, overly complex, and unfair in myriad ways. Our tax code is also failing at its most fundamental purpose, which is to raise sufficient revenue to meet our needs as a country in an equitable way. Fundamental tax reform—a reform that broadens the tax base and eliminates economic distortions—is important for promoting long-term economic growth.

That said, tax reform simply cannot address the central economic challenge facing the United States right now—the severe and prolonged jobs crisis, which is a product of the lack of demand in the economy. At a time of 9 percent unemployment and vast unused resources, Congress should be focused above all else on boosting demand, reducing unemployment, and putting our economy back on a path toward healthy economic growth.

And so my testimony today will summarize briefly the reasons why I believe that fundamental tax reform is an important priority, but one that should not derail immediate and fast-acting measures to address our most pressing challenge—putting people back to work. My testimony will then discuss some of the critical issues and principles in tax reform, including:

• The fiscal context for tax reform
• The need to avoid tax policies that would shift a greater share of the tax burden on middle-class families
• The need for business tax reform that encourages investment and job growth in the United States, levels the playing field among competing businesses, and ensures that companies pay their fair share

I. The immediate economic challenge

The most immediate and fundamental challenge facing the economy today is the jobs crisis. More specifically, it is the $1 trillion hole in aggregate demand caused by the collapse of the housing bubble, the financial crisis, and continued mass unemployment. The Great Recession is still taking its toll on the economy. The output gap—the difference between the economy’s actual output and its capacity to produce at full employment—is still at about 6.7 percent of potential GDP, or nearly $1 trillion per year. That gap has closed somewhat since the low point of the Great Recession, thanks in part to the American Recovery and Reinvestment Act and other policies, but the Congressional Budget Office projects it to remain at 5 percent below potential GDP through 2011, with an output gap persisting for several years to come and inflicting continued pain on workers.

The economy needs more aggregate demand to close the output gap and return people to work. CBO predicts that if we stay on the current policy path “a large amount of labor and capital resources [will] be unused for some time.” The fact that the economy is not performing at its potential is shown most dramatically and tragically in the fact that 14 million people remain unemployed, and long-term unemployment stands at record levels. The prolonged output gap means that business investments are not being made and worker skills are atrophying, which hurts our national economic competitiveness.

With excess capacity, businesses will be hesitant to hire and invest until they are confident there will be demand for their products and services. The most urgent problem is not a lack of capital, at least not for large businesses. The corporate sector has been enjoying strong profits and is flush with cash: Nonfinancial companies are holding more than $2 trillion in cash and liquid assets in the United States, according to the Federal Reserve. The tax code is now strongly incentivizing business investment, with 100 percent expensing (full write-offs) of investments made this year. And despite the claims, “regulatory uncertainty” is not a real explanation for the lack of hiring. Both the economic data and business owners themselves point to a lack of demand as the major obstacle to job creation and economic growth.

Though it is not the subject of my testimony today, my colleagues at the Center for American Progress have identified the most promising ways to boost consumer and business demand and create private-sector jobs while investing in the future. They include: investing in infrastructure, aiding the housing market by reducing the flood of foreclosed homes, providing aid to the states to prevent further public sector layoffs, and supporting the energy-efficient retrofitting of homes and businesses. Congress also cannot afford to worsen consumer demand by allowing the temporary payroll tax reductions and long-term unemployment assistance to expire. These ideas and others are encapsulated in the president’s American Jobs Act, which many independent forecasters predict will create as many as 1.3-1.9 million jobs.

In sum, tax reform is a worthy goal. Done right, it can improve long-term economic growth, especially if it is part of a long-term growth strategy that also makes important public investments and strengthens the middle class. But it is not a response to the immediate and ongoing jobs crisis. And therefore discussions of tax reform should not be to the exclusion of immediate job creation measures like the American Jobs Act.

II. The context for tax reform: long-term fiscal challenges and growing inequality

a. The existing tax code does not raise adequate revenue to meet national needs under any realistic fiscal scenario

Any tax reform effort will have to be considered against the backdrop of the long-term fiscal challenges facing the United States. Those challenges are undeniable. The United States was running deficits even at the peak of the business cycle in the mid-2000s. Since 2008, the recession and Congress’s policy responses caused a sharp fall-off in revenues. The short-term fiscal situation has improved, with deficits as a share of GDP declining for fiscal year 2012 and projected to decline further over the next several years. However, the more serious challenges are in 2021 and beyond, as an aging population, rising health care costs (even if the rate of growth slows), responsibilities to the millions of new Iraq and Afghanistan veterans, a decaying infrastructure in need of rebuilding, and other ongoing national needs exert pressures on the budget. The United States will also have to pay a growing amount of interest on the debts incurred from the wars, the 2001-03 tax cuts, and the larger deficits caused by the recession.

The fact is that our current tax policies do not raise nearly enough revenue to stop the accumulation of debt, even in scenarios with draconian spending cuts. If we maintain our current tax policies, revenues will only reach 18.1 percent of GDP in 2021 and will average just 17.7 percent over the next decade. That is not nearly enough to prevent continued deficits even under the House-passed budget, under which federal spending would decline to about 20 percent by the end of the decade. That budget would dramatically reduce public investments in education, infrastructure, and scientific research while tearing at the social safety net, including turning Medicare into an inadequate voucher program and slashing Medicaid.

In light of these realities, every major bipartisan effort to propose solutions for the nation’s long-term fiscal challenges has found it necessary to rely on both spending reductions and substantial revenue increases that boost revenues to at least 20 percent of GDP, or significantly higher. It should be noted that federal revenues averaged about 20 percent of GDP over the four-year period from FY 1998-FY 2001, when the budget was last in balance—and spending needs were much less then, with a smaller pre-9/11 military budget, a younger population, and lower health-care costs per capita.

The fact that our current tax code is inadequate to fund our national needs without accumulating more debt means that tax reform must contribute to solving our long-term fiscal challenges. In other words, it must be revenue-positive. If our tax code cannot be reformed to raise additional revenue, the resulting deficits will drive debt-to-GDP ratios to unsustainable levels, with negative repercussions for the United States economy over the long term.

Many hold up the last major tax overhaul, the Tax Reform Act of 1986, as a model for today. TRA86 was ostensibly revenue neutral, achieving significant reductions in both corporate and individual tax rates in exchange for reductions in tax expenditures and loopholes. But today, our long-term budget challenges are much more severe than they were in 1986. And the large budget deficits that persisted after 1986 were closed only through further deficit reduction efforts, including increases in the top marginal rates in 1990 and 1993.

The good news is that unlike some European countries that also have long-term fiscal imbalances, the United States is a low-tax country. Federal receipts as a share of GDP were under 15 percent for the last three years—the lowest since 1950. The United States also raises comparatively little revenue by international standards: Total revenues in the United States were 26.9 percent of GDP from 2004-2008, nearly 25 percent lower than the average OECD country. Within the OECD, only Mexico, Chile, Turkey, and South Korea had lower taxes as a share of their economies. By comparison, revenues total 33 percent of GDP in Canada and 36 percent in Britain. The bottom line is that there is ample room to increase revenues. We are a low-tax country now and will remain a relatively low-tax country even if we balance the federal budget entirely with new revenue.

b. Tax reform must not exacerbate growing income inequality by shifting a greater share of the tax burden onto low-income Americans and the middle class

Another important part of the context for tax reform is that income inequality has dramatically widened in recent decades. Top income earners, most dramatically the top 1 percent, have pulled apart from those in the middle and at the bottom. In recent years, the share of income accruing to the top 1 percent reached levels not seen since the 1920s. At the same time, real incomes for the middle class have barely grown.

As income inequality has continued to grow, and while middle-class incomes have stagnated, the tax rates paid by the well-off have plunged. Millionaires are now paying about one-quarter less in federal taxes as a share of their income as they were as recently as the mid-1990s. The top 1 percent of Americans has experienced a similar reduction in taxes. A principal cause of the lighter tax burden on the wealthy was the tax rate cuts enacted under President George W. Bush in 2001 and 2003: The average millionaire (whose incomes average $2.9 million) will pay $135,000 less this year because the 2001-03 tax cuts are still in effect, according to the nonpartisan Tax Policy Center. The wealthy have also benefited greatly from historically low rates on income from capital gains and dividends.

The end result is a federal income tax code that is generally progressive, but less progressive than it used to be, and one in which many very wealthy people pay lower effective rates than people below them on the income scale. And of course the federal income tax is only one component of a larger tax system; other kinds of taxes, including payroll taxes and consumption taxes (e.g., excise taxes, state and local sales taxes) fall harder on those at the bottom than those at the top. Families in the middle of the income spectrum pay 9.4 percent of their incomes in federal payroll taxes on average, while the top 1 percent pays only 1.6 percent. This is because the largest portion of federal payroll taxes only applies to a worker’s first $106,800 in wages, and not to wages in excess of that amount or to investment income.

President Obama has said that one of the principles underlying tax reform should be the “Buffett rule.” The “Buffett rule” is not a specific tax code rule, but the general principle that no millionaires should be paying lower taxes as a share of their income than middle-class families. The current tax code often violates this principle. For example, there are nearly 100,000 millionaires (about one in four) who pay a tax rate of less than 26.5 percent—more than 10.4 million Americans earning less than $100,000 pay. Statistics like these undermine the sense of basic fairness that should undergird the tax code.

So in sum, we need additional revenues. And the group of Americans whose incomes have skyrocketed are now paying lower taxes than they were just a short time ago. These factors point toward allowing the Bush tax cuts on top-incomes to expire. Doing so would reduce the deficit over 10 years by about $800 billion—two-thirds of the way toward the amount of deficit reduction that the Joint Select Committee on Deficit Reduction is charged with finding.

It is often claimed that allowing the high-end Bush tax cuts to expire—which would simply reinstitute the top marginal tax rates that were in effect during the 1990s economic expansion—would stifle job creation and harm small businesses. It is even said that the very prospect that tax rates on the rich will return to 1990s levels—with the 33 percent bracket going to 36 percent and the 35 percent bracket going to 39.6 percent—is holding back hiring and business investment. Neither of these claims is true. Three facts underscore why.

The first is recent history. The expiration of the two top brackets would simply revert the top marginal tax rates to levels that were in effect from 1993-2001. The same claims about economic growth and the negative impact on small business were made in 1993, when the top marginal rate was raised from 31 percent to 39.6 percent, a much larger percent increase than is contemplated now. What followed, however, was a period of very strong economic growth and job growth, among both large and small employers. And the federal budget was balanced for the last four fiscal years the 1990s tax rates were in effect.

With higher tax rates on both ordinary income and capital gains in effect, business investment was stronger in the 1990s than in the period since the 2001-03 tax cuts. Millions of jobs were created and real incomes grew across the income spectrum. About 18.2 million private-sector jobs were created in the six years after the top tax rate was raised to 39.6 percent in 1993, compared to only 4.7 million private-sector jobs created in the corresponding period after the 2001 Bush tax cuts, which does not even include job losses from the Great Recession. Small businesses created jobs at a much faster rate when the Clinton-era tax code was in effect. Between 1993 and 2000 small businesses (those with fewer than 500 employees) added nearly a million jobs per year on average (973,000). But in the period after the Bush tax cuts were enacted in 2001 until the onset of the recession in 2007, small business job growth was less than twice as rapid (414,000 per year).

Also undermining the claim that small businesses will be harmed if the high-end Bush tax cuts expire on schedule is that only a very small percentage of small businesses owners are in the highest tax brackets. Only about 3 percent of small business owners are in the top two tax brackets.

And finally, the portion of the benefit of extending the high-end tax cuts going to small business employers is very small. A new Treasury report reveals that fully 92 percent of the tax benefit would go to corporate executives, investors, highly paid professionals, athletes, and other people who are not small business employers.

Two other points should be emphasized. First, even those in the 33 and 35 percent brackets would continue to benefit by about $6,500 per year from extensions of the current lower bracket rates, which President Obama has proposed in each of his budgets. And they would only pay incrementally higher tax rates on dollars of income earned above the cutoffs for the top two brackets. A married business owner with $300,000 in total income and $250,000 in taxable income, for example, would pay only $243 more under the rate structure in the president’s budget proposal than she is now—or less than 0.1 percent of her total income. A business owner with $600,000 in total income and $500,000 in taxable income would pay only about $10,000 more—or only 1.5 percent of his total income. It is difficult to believe that a business owner would respond to these modestly higher personal tax bills by cutting payroll or foregoing promising investments. It is even more difficult to believe that the very prospect of such modest tax increases taking effect in 2013 would be chilling business investment today. It should also be emphasized that because labor costs are deductible, the marginal personal tax rate of the owners of a business has no impact on the business’s incentive to hire workers.

Top bracket rates of 36 and 39.6 percent are much lower than the top rates that existed for most of the history of the income tax, including the United States’s strongest periods of economic growth. The historical evidence shows that marginal rates higher than current rates are perfectly consistent with robust economic growth. As my colleague Michael Linden has found, the United States has experienced stronger economic growth and faster job creation in periods when top marginal tax rates were much higher than the current 35 percent.

In sum, there is little reason to believe that the expiration of the Bush-era marginal income tax rates on high-incomes will have a negative impact on economic growth or job creation. Rather, they will strengthen our economy’s long-term prospects by contributing substantially to debt reduction. The expiration of the top two marginal rates is an important first step toward a fair and fiscally responsible tax code.

I. Corporate and business tax reform

Finally, I would like to address the corporate and business tax reform—in particular the need for tax reform that encourages rather than discourages job growth in the United States, levels the playing field among competing businesses, and ensures that U.S. companies pay their fair share.

The corporate tax is an important component of our tax system. It is the third largest federal revenue source, behind individual income and payroll taxes. It also provides a needed backstop to the individual income tax, preventing tax sheltering in corporations and helping to maintain the progressivity of the income tax. However, the corporate tax is in need of reform. In President Obama’s words, “Over the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries. Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change.”

The president is right that the corporate tax code favors some industries over others, distorting investment and thereby impeding economic growth over the long-term. The corporate tax code is ripe for reform.

a. The corporate tax burden in context

As with individual taxes, the discussion of corporate tax reform must take into account the fiscal challenges facing the United States. Corporate taxes once contributed about 30 percent of federal revenues in the 1950s, but they have steadily declined and in recent years have averaged only about 10 percent of federal revenues. Corporate taxes represent a smaller portion of GDP in the United States than in other major economies. With the diminishing corporate tax, the United States has relied more heavily on other taxes, in particular payroll taxes on wages. Payroll taxes, which were about 12 percent of federal revenues during the 1950s, have reached 40 percent of revenues. The increasing share of business activity being conducted via “passthrough” entities, including S corporations and LLCs is partly responsible for the decline in corporate tax revenues. But also responsible is the fact that corporations are paying lower tax rates on their profits than they did in the recent past.

This is the case despite the fact that the United States’s 35 percent statutory tax rate—the rate on the books—has not been lowered in 25 years and is now the second highest in the OECD. But solely focusing on the statutory rate leads to misperceptions about the overall tax rate actually paid by corporations, because it ignores the wide variety of tax preferences and loopholes that exist in the code. Corporate “tax expenditures,” the special exemptions, deductions, and credits that companies use to reduce their tax bill, total roughly $1.2 trillion over 10 years. And not all features of the tax code reducing corporate effective rates appear on the official tax expenditure lists.

The better measure of the actual tax paid by corporations is their effective rates. And corporate effective rates are much lower than the statutory 35 percent rate. Recent studies have found that the effective rates of large U.S. corporations are in line with or actually lower than their foreign counterparts.

• In 2007, a Treasury Department survey found that by one measure, the average tax rate paid by U.S. corporations from 2000-2005 was 13.4 percent—below the OECD average of 16.1 percent. As the Treasury report summarized, “The contrast between [the United States’s] high statutory corporate income tax rate and low average corporate tax rate implies a relatively narrow corporate tax base, due to accelerated depreciation allowances, corporate tax preferences, and tax-planning incentives created by [the] high statutory rate.”

• A recent analysis of public company financial statements by Citizens for Tax Justice and the Institute for Taxation and Economic Policy, or CTJ/ITEP, found that 280 of the largest U.S. corporations paid an average effective tax rate of 18.5 percent over 2008-2010—just over half of the statutory rate.

• A recent study of the effective tax rate paid by the largest 100 U.S. companies and 100 largest European Union companies over the last decade found that the American companies paid lower income tax rates, on average, than their European rivals.

• Other studies have found that corporate effective rates are closely in line with those in other large countries.

Because their success is bound to the success of the overall U.S. economy, U.S. corporations have a strong stake in our country’s fiscal sustainability and growth. They benefit greatly from U.S. government services, from law enforcement to product safety, to patent protection, to education and workforce development. Given these realities, the corporate sector should not be exempted from the process of deficit reduction. To take the corporate income tax off the deficit reduction table means that critical government services and public investments would face even deeper cuts, or that middle-class Americans would face a larger share of the tax burden. Neither alternative is desirable. The narrowness of the U.S. corporate tax base means that U.S. corporations can, on the whole, contribute a greater share of revenues. Accordingly, corporate tax reform should be at least revenue-neutral. Given the potential savings from broadening the corporate tax base, it should be possible to achieve deficit reduction from the corporate tax while still lowering the statutory rate.

b. International tax reform

The corporate tax code is replete with explicit subsidies and other preferences that cause economic distortions. One of the most significant distortions in the corporate code is its fundamental bias toward foreign investment over investment in the United States.

The debate over international taxes is often framed as a choice between “worldwide” and “territorial” tax systems. I would maintain that these labels obscure the more fundamental issues of whether our tax system encourages investment and job creation in the United States and whether it protects our revenue base.

Despite the fact that the United States nominally has a “worldwide” tax system, foreign profits are taxed very differently than domestic profits. Because of the feature known as “deferral,” U.S. multinationals can delay paying U.S. taxes on overseas profits indefinitely; whereas they pay taxes on domestic profits in the year they are earned. Overseas profits are taxed only when and if they are returned to the United States, as when they are paid out as dividends from overseas subsidiaries to U.S. parents. At that point corporations do not pay the U.S. corporate rate, but rather the difference between the U.S. corporate rate and the effective rate of foreign taxes they have paid. (This is because corporations are entitled to a credit for foreign taxes.)

Our current deferral system provides tax incentives for overseas investments. In fact, it encourages U.S. companies to make job-creating investments offshore even if similar investments in the United States (absent tax considerations) would be more profitable. As a result of “deferral” and other aspects of the U.S. international tax system, U.S. multinational corporations pay much lower tax rates on foreign investments than on domestic investments: In 2008, the Government Accountability Office, or GAO, found that corporations pay a 16.1 percent rate on foreign-source income (combining both the source country tax and the residual U.S. tax), and a 25.2 percent rate on U.S. source income. In recent years, companies have become more adept at lowering the effective rate on foreign investments, and thus their overall effective tax rates, through complex tax strategies enabled by U.S. policy changes. These strategies are only available to large multinationals.

The tax differential between foreign and domestic income not only puts a thumb on the scale in favor of offshore investment; it also creates enormous incentives for companies to use complex legal and accounting techniques to move income-producing assets to low-tax countries or tax havens, especially assets like valuable intellectual property that exist only on paper. U.S. companies report their largest profits in small countries like the Netherlands, Luxembourg, and Bermuda—even though that is clearly not where the most real economic activity is taking place. The U.S. Treasury, the Government Accountability Office, the Joint Committee on Taxation, and numerous independent researchers have published studies pointing to strong evidence of tax-motivated income shifting. The resulting phenomenon has been called “stateless income”—profits that migrate to low-tax or no-tax jurisdictions, eroding the tax bases of the countries where the income is actually generated (i.e., where the R&D is performed, the business decisions are made, where the customers are, and so on).

Corporate income shifting decimates the corporate revenue base, draining the United States of tens of billions of dollars in revenue every year. By one estimate, the U.S. government lost about $90 billion in revenue in 2008 from corporate income shifting—up from $60 billion in 2004. To put that figure in perspective, the corporate income tax only raised an average of $300 billion per year during the 2004-08 timespan.

These two problems—the bias toward overseas investment and the erosion of the tax base due to income shifting—could be made worse if the United States moves in the direction of a “territorial” tax system without more fundamental reforms. Under a territorial system, overseas profits would be tax-exempt, not just tax-deferred. The only remaining backstop against profit shifting, the tax upon repatriation, would be removed.

It is often said that the United States must move to a territorial system to maintain competitiveness with other countries that have adopted territorial taxation. But there is little evidence that U.S. firms’ global competitiveness is actually being undermined by the existing deferral system, which (because of the combination of deferral and other aspects of the tax code) often allows them to pay lower taxes than they would under a properly functioning territorial system. Of course, the competitiveness of a company is determined mostly by nontax factors; but to the extent taxes matter, the key figure is the company’s relative effective tax rate. The most recent comprehensive survey of the effective tax rate paid by the largest 100 U.S. companies and 100 largest European Union companies over the last decade found that the American companies paid about the same or lower effective tax rates, on average, than their European rivals.

As one of the authors of that study notes, the reason that EU companies have the same or higher effective rates is that EU countries have a broader tax base. Specifically, those countries have stronger antiabuse rules that deter the shifting of profits into tax havens. Rather than moving headlong toward territoriality, the United States should address income shifting directly. A good place to start would be to enact a rule requiring current U.S. taxation of income reported in low-tax countries or tax-havens. Many countries with “territorial” tax systems already have such rules.

c. Leveling the playing field among business investment by reducing inefficient tax code subsidies

Finally, corporate tax reform provides an opportunity to level the playing field between businesses and reduce the economic distortions caused by special tax preferences. The tax code contains some $130 billion in annual tax expenditures benefitting businesses. The approximately $100 billion for corporations represents a significant share (one-quarter to one-half) of all corporate tax revenues.

The relative generosity of these types of subsidies helps lead to vast differentials in the relative tax burdens of various industrial sectors. For example, according to financial statement research by New York University professor Aswath Damodaran, drug and biotechnology firms paid a small fraction of the statutory rate (effective rates of 4.5 and 5.6 percent, respectively); while heavy construction and trucking firms paid close to 35 percent (33.8 percent and 30.9 percent, respectively). Financial services firms paid 16.5 percent, while petroleum producers paid 11.3 percent. The recent CTJ/ITEP analysis of corporate effective rates also found that corporate effective tax rates vary widely by industry: Financial firms, for example, paid 15.5 percent effective rates; miscellaneous manufacturing paid 23.1 percent; and engineering and construction paid 27.4 percent. CTJ/ITEP found that 56 percent of total tax subsidies went to four industries: financial; utilities; telecommunications; and oil, gas, and pipelines.

By reducing unjustified preferences, Congress can level the playing field for competing investments. Removing tax-caused distortions can improve long-term economic growth; it can also reduce the deficit and potentially help pay for a corporate rate reduction.

To be sure, however, some business tax expenditures have economic justifications. The low-income housing tax credit, for example, helps address the dearth of affordable housing in many communities and cannot simply be eliminated. There is also a strong theoretical justification for the research tax credit, in that one firm’s research and experimentation expenses may lead to innovations that benefit other firms and the broader economy. Congress should, however, conduct ongoing reviews of the credit’s effectiveness in increasing innovative research above the levels that would exist in its absence. In general, Congress should apply the same level of scrutiny to these kinds of special tax breaks as it does to programs that spend taxpayer dollars directly. After all, as economists across the ideological spectrum recognize, tax “expenditures” are the economic equivalent of spending programs.

In reviewing the tax expenditure budget, the critical question is not whether the sectors that receive special tax breaks support jobs or economic activity—of course they do—but whether there is a strong enough public policy reason to give them taxpayer subsidies not available to other businesses. A useful framework for evaluating special tax provisions is whether, if they were structured as direct-spending programs, they would make economic sense or represent the best use of taxpayer dollars.

The need to scrutinize the effectiveness of business tax expenditures highlights one final point: Tax reform is hard. Fiscally responsible reforms to corporate taxes are probably not possible without reforms to other aspects of the tax code, potentially affecting individuals and noncorporate businesses. Reform is extremely complex, and must be done right, which will take time.

That brings me back to my central point, which is that while tax reform has the potential to enhance our economy’s growth prospects over the long-term, it should not distract Congress from the urgent jobs crisis facing America today.

Thank you once again for the opportunity to appear today.

Seth Hanlon is Director of Fiscal Reform for the Doing What Works project at American Progress.

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SOURCE: Center for American Progress

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I am honored to be given the opportunity to share my findings with you about how many existing provisions of the U.S. tax code directly inhibit the cost-effective commercialization and deployment of clean, homegrown energy, what can be done to remedy this, and how these actions will help jumpstart the U.S. economy and restore our leadership in what will certainly be the biggest job-creating sector of the century.

My new book Straight Up delves into the full nature of our current energy crisis problems and its solutions. It explains many of the unintended and uninternalized side effects that our nation’s addiction to fossil fuels has on our economy, our national security, and on our environment. All of  the findings I will discuss with you today are based on research conducted by me for my book and my blog, or are based on research conducted by my colleagues at the Center for American Progress Action Fund.

In my testimony today, I would like to stress three main points:

First, strong government action is needed to address our mounting energy challenges. Our overreliance on fossil fuels, which harm human health, our billion-dollars-a-day addiction to imported oil, the economic threat posed by peak oil, our declining international competitiveness in energy technologies we invented, and the threat of human-caused climate change present a grave danger to our economy, our national security, and our children’s health and well-being. They are caused in large part by our out-of-date, uncoordinated, and counterproductive energy tax policy framework.

Second, our existing policy framework, including our tax policy, is inadequate to address the challenges we face. To address these problems, our nation needs to replace our existing patchwork of energy tax incentives with a comprehensive energy strategy —something we have not had for decades. We urgently need a shrinking cap and a rising price on carbon, which the House passed last year. We also need to eliminate the perverse subsidies hidden in our tax code that perpetuate our energy problems; increase transparency of government spending on energy tax incentives; and make existing tax incentive programs for clean energy more efficient, stable, and forward looking.

Third, addressing our problems creates a real economic opportunity. Addressing our energy and climate problems will create immediate and sustained economic growth, by fostering markets and demand for new technologies and new jobs in new industries; by freeing market forces and reducing uncertainty of our investors thereby unleashing a flow of private-sector capital to tackle our nation’s energy challenges; and by catalyzing innovation, our nation’s first and greatest competitive advantage.

I will elaborate on each of these core points in the testimony that follows.

1. Need for action

The United States sits at a profound crossroads in its energy and economic future.

Continuing the status quo will shackle our infrastructure and our economy for decades to the inexorable rise of volatile imported fuel prices; to outmoded and wasteful methods of production that rob our industries of the ability to compete internationally; and to the increasingly likely prospect of catastrophic climate impacts in a world that is 9°F warmer.

Meanwhile, the path of action will lead us toward economic prosperity and greater international competitiveness by driving demand and growing markets for the technologies of the future here at home; by utilizing America’s greatest competitive advantage: innovation; and by avoiding the need to dramatically reshape our society in response to the imminent and severe consequences of unabated human-caused climate change.

As Larry Summers, director of the National Economic Council, said recently: “Which has a greater danger going forward: that we will, in the name of comprehensive energy policy somehow do too much that will affect energy markets by encouraging efficiency or encouraging exploration, or that we will again miss the opportunity, that we will again not act strongly enough with respect to a gathering storm?”

Here’s what we can expect from a continuation of the status quo:

Cost of energy to increase, in part because of peak oil production

According to the Energy Information Administration’s “International Energy Outlook 2008,” world energy consumption is expected to expand by 50 percent from 2005 levels by 2030. This means energy prices will rise uncontrollably as ever-increasing demand outstrips our planet’s finite and limited supply. As an example, energy prices rose throughout the Bush administration, and the average family spent over $1000 more on energy in 2008 than they did in 2001.

In October 2009, Deutsche Bank’s report, “The Peak Oil Market: Price dynamics at the end of the oil age,” forecast a $175 a barrel oil price in 2016. Dr. Fatih Birol, the chief economist at the International Energy Agency (IEA) said in August, “We have to leave oil before oil leaves us.” The U.K.’s Independent opened its interview of Birol:

Dr. Birol said that the public and many governments appeared to be oblivious to the fact that the  oil on which modern civilisation depends is running out far faster than previously predicted and that global production is likely to peak in about 10 years—at least a decade earlier than most  governments had estimated.

Similarly, in February 2009, a Merrill Lynch research report warned of steep drops in existing oil production meant that we needed to replace an amount of oil output equal to Saudi Arabia’s production every two years.

A March 2009 McKinsey report concluded, “the potential looms for liquids demand growth to outpace supply creating a new spike in oil prices as soon as 2010 to 2013, depending on the depth of the economic downturn.”

More domestic production will do nothing to stop oil at $150 a barrel—and then $200 a barrel. Last year, the U.S. Energy Information Administration report, “Impact of Limitations on Access to Oil and Natural Gas Resources in the Federal Outer Continental Shelf” analyzed the difference between full offshore drilling (Reference Case) and restriction to offshore drilling (OCS limited case). In 2020, there is no impact on gasoline prices. In 2030, U.S. gasoline prices would be three cents a gallon lower with full offshore drilling.

Finally, the peak oil problem is graver than it appears for one simple reason: replacing oil in the transportation sector requires strong government action two decades before a peak because of the time needed to replace vehicles and fuel infrastructure. That was the conclusion of a major study funded by the Bush administration’s Department of Energy in 2005 on "Peaking of World Oil Production." The report notes:

The world has never faced a problem like this. Without massive mitigation more than a decade before the fact, the problem will be pervasive and will not be temporary. Previous energy transitions (wood to coal and coal to oil) were gradual and evolutionary; oil peaking will be abrupt and revolutionary.

Fossil fuel dependence threatens our economic security

• The volatility of the oil market during the last 30 years has cost the U.S. economy approximately $8 trillion.
• The United States currently imports approximately 70 percent of its oil. In doing so, we export tremendous domestic wealth—the United States spent $475 billion on foreign oil in 2008 alone.

Fossil fuel dependence also threatens our national security

• Because nearly 40 percent of our oil imports come from potentially hostile or unstable regimes, and 92 perent of conventional oil reserves are in these nations, U.S. dependence on oil weakens our international leverage and undermines our foreign policy objectives.
• Inefficient use and overreliance on oil burdens the military, undermines combat effectiveness,  and exacts a huge price tag—in dollars and lives.
• Our energy grid’s inefficiencies and inadequacies pose a threat to our domestic military installations and their critical infrastructure, which are unnecessarily vulnerable to deliberate or accidental incident.

Fossil fuel dependence harms our health and that of our children

The U.S. National Academies reported in October 2009:

A major 2009 report by National Research Council examines and, when possible, estimates “hidden” costs of energy production and use—such as the damage air pollution imposes on human health—that are not reflected in market prices of coal, oil, other energy sources, or the electricity and gasoline produced from them. The report estimates dollar values for several major components of these costs. The damages the committee was able to quantify were an estimated $120 billion in the U.S. in 2005, a number that reflects primarily health damages from  air pollution associated with electricity generation and motor vehicle transportation. The figure  does not include damages from climate change, harm to ecosystems, effects of some air  pollutants such as mercury, and risks to national security, which the report examines but does not monetize.

Nearly half those damages were from transportation. Natural gas, which accounts for 20 percent of our nation’s electricity generation and the “vast majority” of heating demands, only costs us a little over $2 billion annually in unseen costs.

These costs almost certainly underestimate the actual health costs of fossil fuels. The NRC estimated the total mortality due to our fossil fuel consumption at 20,000 people each year—10,000 due to coal alone. But the American Lung Association has reported that coal power plant pollution causes 24,000 premature deaths every year by itself. In addition, ALA has estimates that coal pollution causes more than 550,000 asthma attacks, 38,000 heart attacks, and 12,000 hospital admissions.

A 2008 study by the Columbia Center for Children’s Environmental Health (CCCEH) found:

Closing coal-fired power plants can have a direct, positive impact on children’s cognitive development and health…

[P]re-natal exposure to coal-burning emissions was associated with significantly lower average developmental scores and reduced motor development at age two. In the second unexposed group, these adverse effects were no longer observed; and the frequency of delayed motor developmental was significantly reduced.

In November, The Lancet medical journal published six new studies that make clear “climate change is the biggest global health threat of the 21st century.” One of the papers followed 352,000 people in 66 U.S. cities. Kirk R. Smith, professor of global environmental health at UC Berkeley and lead author of the paper, said:

Combustion-related air pollution is estimated to be responsible for nearly 2.5 million premature deaths annually around the world and also for a significant portion of greenhouse warming. These studies provide the kind of concrete information needed to choose actions that efficiently reduce this health burden as well as reduce the threat of climate change.

The science is clear: Climate change is real, fast, and dangerous

Yes, the 3,000-page review of the scientific literature by the United Nations’s Intergovernmental Panel on Climate Change in 2007 had a couple of "trivial errors" in it, as The Washington Post put it.

But as a physicist who writes on climate issues, I’ve read much of the original literature and talked to dozens of the leading climate scientists. The real story was captured in a recent headline in Scientific American: "Despite Climategate, IPPC Mostly Underestimates Climate Change."

The British Royal Academy, the oldest scientific body in the world, and the Met Office, part of the United Kingdom’s Defence Ministry, further noted that "even since the 2007 IPCC Assessment the evidence for dangerous, long-term and potentially irreversible climate change has strengthened."

The basic science is clear. Naturally occurring heat-trapping gases keep the planet about 60°F warmer than it would otherwise be, giving us the livable climate we have today. Since the Industrial Revolution, humankind has spewed vast quantities of extra greenhouse gases into the atmosphere, principally carbon dioxide from burning fossil fuels, causing more and more heat to be trapped. And so it is warming.

National Oceanic and Atmospheric Administration Climate Monitoring Chief Deke Arndt said in October, “The last 10 years are the warmest 10-year period of the modern record. Even if you analyze the trend during that 10 years, the trend is actually positive, which means warming.”

It may have seemed like a cool January in parts of this country, but globally it was the hottest January in the satellite record. And while it may seem counterintuitive, we actually get more snowstorms in warm years.

The Bush administration itself concluded in a major 2008 report, "It is well established through formal attribution studies that the global warming of the past 50 years is due primarily to human-induced increases in heat-trapping gases." That study noted we’re already seeing more extreme weather events, especially intense precipitation.

In the past million years, the climate was primarily driven by natural cycles initiated by changes in the earth’s orbit, which led to emissions of greenhouse gases, an amplifying feedback that caused rapid warming after long ice ages. As pre-eminent climatologist Wallace Broecker wrote in 1995, "the paleoclimate record shout out to us that, far from being self-stabilizing, the Earth’s climate system is an ornery beast which overreacts even to small nudges."

Now we are punching the beast in the face by emitting billions of tons of global warming pollution a year. If we don’t act quickly, then, by midcentury, CO2 concentrations in the air will reach levels not seen in 15 million years, when it was 5°F to 10°F warmer and seas were 75 to 120 feet higher, a 2009 study concluded.

Indeed, many studies make clear we risk 9°F warming this century alone. And that isn’t the worst-case scenario; that’s what is projected to happen [if] we stay anywhere near our current emissions trajectory. The plausible worst-case scenario, as the Met Office warned last year, is 13-18°F over most of U.S. and 27°F warming in the Arctic—and it could happen in 50 years. But “we do have time to stop it if we cut greenhouse gas emissions soon.”

The good news is that sea levels don’t rise as fast as temperatures, but the bad news is that everywhere you look around the planet, ice is disappearing much faster than expected, including the dynamic disintegration of the great ice sheets on Greenland and Antarctica. Whereas the IPCC had ignored dynamic effects and predicted sea levels might rise perhaps only one to two feet this century if we took no action to reduce emissions, major studies since 2007 put the estimate at 3 to 7 feet, enough to generate 100 million environmental refugees or more.

Other studies warn that the U.S. Southwest could become [a] permanent dust bowl post-2040, with Kansas above 90°F some 120 days a year. A 2010 study in Nature Geoscience found that oceans are acidifying 10 times faster today than 55 million years ago when a mass extinction of marine species occurred. We are literally poisoning our oceans. Unrestricted burning of fossil fuels threatens a new wave of die-offs. The title of a recent documentary on ocean acidification put it bluntly: “Imagine a World Without Fish.”

The U.S. is falling behind in advanced manufacturing, innovation

• China is a leading manufacturer of photovoltaic cells, second only to Japan, and it is set to be the world’s leading manufacturer of wind turbines by the end of 2009.
• A March study by the Pew Charitable Trusts, based on data from Bloomberg New Energy Finance, found that China was outspending the United States in clean energy by $34.6 billion to $18.6 billion in 2009.
• The United States had less absolute renewable power capacity than either China or the 25 member nations of the European Union as of 2006.
• The United States was investing far less in renewable energy annually in 2007 than Germany, which has only one-third the population of the United States and an economy that is less than one-fourth our size.
• The European Union committed to having 20 percent of its final energy coming from renewable sources by 2020 and China is working to have 16 percent come from renewable sources by 2020. Sixty-six other countries worldwide have indeed committed to nationwide standards, but our Congress has yet to set any, though the House climate bill did have a relatively weak new standard.
• Cars in China that get about 36 miles per gallon will be required to get 42.2 miles a gallon in 2015—an 18 percent increase over the next six years. European emissions agreements pushed mileage in Europe to about 40 mpg by 2006 and are on track to meet their target of 47 mpg by 2012. America, meanwhile, is aiming for only 35.5 mpg by 2012.

2. Energy tax changes we need

To be competitive in the 21st century, America needs what it has lacked for decades—a comprehensive energy strategy across all aspects of government. This requires creating new energy policies that internalize existing market externalities such as the cost of carbon and reshaping our existing tax incentives, which perpetuate these externalities by distorting the  energy market with perverse incentives.

As members of the House Ways and Means committee, you have the opportunity to fix a number of fundamental barriers to clean energy that are limiting its growth, its job creating potential, and by extension the future competitiveness of the American economy. Our energy tax policies must be revised to eliminate perverse subsidies, increase transparency, and streamline and maximize the use of incentives for clean energy technologies that create jobs while benefiting our planet.

Remove perverse tax subsidies

Governments around the world provide some $300 billion each year to subsidize fossil fuels, with the U.S. among the leaders. A great many of these subsidies are obsolete, regressive, and downright perverse.

For example, newly released research by my colleague Richard Caperton shows how the outrageous practice of allowing oil companies to claim "percentage depletion" results in billions of dollars of lost government revenue. The money goes instead toward oil company profits.

Oil companies receive a large amount of government spending through the “percentage depletion” system. Without this subsidy, an oil company would only be able to deduct an amount that equals an oil well’s decline in value, as measured by the amount of oil drained from one of their wells in a year (say, 10 percent of the total amount of oil). This is called “cost depletion.”

Percentage depletion, on the other hand, allows an independent oil company to deduct a percentage of revenue (currently, 15 percent per year for the first 1,000 barrels per day) generated from that well even if that amount exceeds the well’s total value. This means that oil companies take deductions as long as a well is producing oil, without regard to how much, or whether, the well is still declining in value.

The Joint Committee on Taxation estimates the cost of percentage depletion by calculating the difference between the taxes companies owe under a percentage- depletion system and what they would owe under a cost-depletion system. They call the difference “excess of percentage over cost depletion.”

The result: Oil companies in 2009 were subsidized $1.3 billion at the taxpayers’ expense to deplete our nation’s finite natural resources as quickly as possible, while spewing planet-warming gasses into the atmosphere.

Allowing oil companies to claim percentage depletion over cost depletion means that taxpayers are writing oil companies a blank check on top of their already generous tax breaks to cover the costs of pumping oil out of the ground, which are already above and beyond their already astronomical profits. But excess percentage over cost depletion is just the largest of a long line of handouts our current tax code gives to oil companies, including other tax breaks for oil exploration, purchasing of mining equipment, tax breaks for enhanced oil recovery, and expensing of so-called "tertiary injectants.”

Please see the attached table put together by my colleagues at the Center for American Progress Action Fund, which gives an overview of energy tax expenditure programs. (See PDF file)

Some argue these subsidies are necessary to facilitate domestic fossil fuel production, and that increasing domestic production will offset imports. However, there is no evidence that these tax subsidies are necessary to make exploring, drilling, and pumping oil economical in the United States. Even George W. Bush acknowledged the strength of market prices in attracting oil investment when he told the American Society of Newspaper Editors in 2005, "I will tell you, with $55 oil we don’t need incentives to the oil and gas companies to explore.

With oil currently at $80 a barrel—and projected by many experts to return to record levels within a decade–there is no reason to keep spending money so fruitlessly. Bush himself said the following year, “America is addicted to oil.” You don’t break your alcoholism by switching from imported to domestic beer. That goes for our oil addiction especially since we have 2 percent of the world’s oil reserves but nearly 25 percent of its demand.

Yet despite this, the Senate just last month passed a bill that perpetuated even more perverse tax incentives that harm our economy. On March 10th, the Senate passed a tax extenders bill that included tax subsidies for such technology as refined coal facilities, low-sulfur diesel, depletion of oil and gas wells, fuel from coke or coke gas. These companies have received decades of subsidies already, and the time has come to ask them to stand on their own feet and stop relying on taxpayer’s money.

The Obama administration FY 2011 budget would eliminate some of these perverse subsidies. The big five oil companies—BP, Chevron, Conoco Phillips, ExxonMobil, and Shell—made profits totaling $656 billion during the eight years of the Bush administration. In 2009, they made an additional $67 billion in profits (with Shell fourth-quarter profits projected). The last thing these companies need is billions of dollars of taxpayer-funded loopholes. The proposed budget would eliminate tax loopholes, including the counterproductive percentage depletion allowance that would cost $36.5 billion from 2011 to 2020.

The budget notes that, "[it] is counterproductive to spend taxpayer dollars on incentives that run counter to this national priority. To further this goal and reduce the deficit, the Budget eliminates tax preferences and funding for programs that provide inefficient fossil fuel subsidies that impede investment in clean energy sources and undermine efforts to deal with the threat of climate change."

Stop investing in polluter pipedreams like coal to liquids

While we clearly have too many existing tax subsidies for polluting fossil fuels, new perverse subsidies are sprouting up all the time. During my testimony on September 5, 2007, before the House Committee on Science and Technology, Subcommittee on Energy and the Environment, I pointed out that government incentives for liquid fuels from coal were a boondoggle waiting to happen.

Coal can be converted to diesel fuel using the Fischer-Tropsch process. During World War II, coal gasification and liquefaction produced more than half of the liquid fuel used by the German military. South Africa has employed this process for decades.

The process is not more widely used today in large part because it is incredibly expensive. It  costs $5 billion or more just to build a plant capable of producing 80,000 barrels of oil a day (the U.S. currently consumes more than 20 million barrels a day).

Five to seven gallons of water are necessary for every gallon of diesel fuel that’s produced (and double that if you co-produce diesel fuel and electricity from coal), according to the June 2006 report, “Emerging Issues for Fossil Energy and Water: Investigation of Water Issues Related to Coal Mining, Coal to Liquids, Oil Shale, and Carbon Capture and Sequestration” by DOE’s National Energy Technology Laboratory.

This is not a particularly good long-term strategy in a nation and a world facing megadroughts and chronic water shortages from human-caused climate change. The heavy water demand is one reason chronically water-short China raised the capital threshold for liquid coal projects in an effort to scale back growth.

Worse than the water issue, the total carbon dioxide emissions from coal-to-diesel are about double that of conventional diesel, as the figure below based on EPA data shows (see figure on PDF file).

Coal to diesel is a bad idea for the nation and the planet. A 2006 study by the University of California at Berkeley found that meeting the future demand shortfall from conventional oil with unconventional oil, especially coal-todiesel, could increase annual emissions by 2.0 billion metric tons of carbon (7.3 gigatons of carbon dioxide) for several decades. That is more than current total U.S. carbon emissions and would certainly be fatal to any effort to avoid catastrophic climate impacts.

Increasing transparency of tax expenditures

Part of the reason why these companies can get away with such absurd subsidies is because of a fundamental lack of transparency in the tax expenditure system. In 2007, the federal government doled out $6 billion in direct spending on energy and $10 billion in additional under-the-radar tax spending not subject to congressional or even agency oversight or review. In the official budget, there is no itemized listing of the trillion dollars in tax expenditures of which this $10 billion in energy subsidies is a part. The only way to find the expenditures is to check a supplemental volume to the budget, known as Analytical Perspectives.

Altogether, less than 40 percent of total energy industry spending gets offically counted as “government spending” in the federal budget, and this number is shrinking as tax expenditures continue to balloon out of control. Between 1999 and 2007, government spending on energy subsidies doubled in size, with almost all of the increase coming from fossil-heavy tax expenditures, which are largely hidden from public view.

To remedy this, new transparency measures are required. My colleagues Richard Caperton and Sima Gandhi put forth the following set of prudent suggestions:

• Tax expenditures need to be held to the same standards as other government spending. This means Congress should clearly state the goals of expenditures, should contain sunset provisions so that that they expire and are re-evaluated, and should require periodic reviews of their effectiveness. Any safeguard that is designed to prevent wasteful spending should also be applied to tax expenditures.
• Congress should provide a rationale for each tax expenditure. When Congress decides to provide financial support to an industry through either a tax expenditure or direct spending, they should state why the chosen method is better than the other.
• Congress should hold agencies responsible for budgeting tax expenditures. Agency budget requests that are sent to Congress should include the tax expenditure spending programs that support their policy areas. Just as agencies are required to explain and report on their direct spending request, they should perform the same exercise on each tax expenditure within their purview. This exercise would hold agencies responsible for explaining how all forms of government spending it uses support its policy areas, and it would empower Congress with the ability to cohesively examine how spending streams work together.
• Congress should adopt standard practices for reviewing tax expenditures. A good start would be to ensure that each expenditure is covered by a requirement that the Joint Committee on Taxation, the Congressional Budget Office, or the relevant agency report on the expenditure’s history, size, and effectiveness.

Streamline and maximize beneficial subsidies that level the playing field

No industry should be permanently reliant on subsidies. That goes double for industries, like fossil fuels, that have the lion’s share of the market and many unmodified cost to Americans’ health and well-being. On the other hand, there are situations where energy tax expenditures can be used to promote the social good, by incentivizing investment in clean energy  technologies.

Production tax credit

One example would be the "new technology credit." This is also known as the "production tax  credit", or PTC, and is found in Section 45 of the tax code. As my CAPAF colleagues explain in their new report:

The credit is given to wind generators—as well as to other renewable energy technologies, such as biomass—and is currently worth roughly 2.1 cents for each kilowatt-hour of wind power generated. For each kilowatt-hour of electricity generated by a wind turbine, the company that owns that wind turbine gets a 2.1 cent tax credit.

To put this in perspective, a medium-sized wind turbine can generate 2 million to 3 million kwh per year, and the average price of electricity sold in the United States is 9.44 cents per kwh. So if a company has a wind turbine that generates about $250,000 in revenue, it will receive a PTC subsidy of $55,000. This subsidy will, in a typical case, increase the company’s after-tax profits by $20,000, which means investors have a higher rate of return than they would without the subsidy…

The Joint Commission on Taxation estimates the production tax credit for wind at $700 million in 2009. Unlike percentage depletion, the PTC does have a commonly understood goal: to increase the amount of electricity generated from renewable resources, including wind power…

Also, unlike with percentage depletion, three different studies show that the PTC influences behavior. First, we can conduct a “natural experiment,” the results of which are illuminating. Researchers in a laboratory experiment often compare the effects of two different scenarios, one of which is the “control” and one of which has been modified, to determine the effect of the modification. In a “natural experiment” researchers find instances where a policy or similar factor changes and compare the before change and after-change scenarios to determine the change’s impact.

The PTC has expired and been renewed several times in recent years, giving us a good “natural experiment.” Each time the PTC expires, we observe that investment in wind generation declines. Then, each time the PTC is renewed, investment in wind generation picks back up. The chart below indicates five different observation points between 1999 and 2006…

But Gilbert Metcalf, an energy economist at Tufts University, has conducted a more sophisticated econometric analysis of detailed data on wind facility investment that accounts for the possibility of this sort of “gaming” of the system and other factors that could explain the ups and downs of wind investment. His conclusion is unequivocal: “[T]he data suggest that much of the current investment in wind can be explained by the production tax credit for wind.”

Cash grant in lieu of investment tax credit (ITC)

The investment tax credit is found in section 48 of the tax code. It subsidizes certain renewable energy technologies. My CAPAF colleagues note:

Under the ITC, some renewable energy projects are eligible for a tax credit for a percentage of the initial capital investment (up to 30 percent depending on the technology). The American Recovery and Reinvestment Act, however, temporarily allows project developers to receive a cash grant from the U.S. Treasury for the same amount. Companies that receive the cash grants are no longer eligible for the tax credit.

The rationale behind the change was that companies that most needed the tax credit had no tax liability to reduce. In order to provide subsidies to these companies, the government needed to use direct spending instead of tax expenditures. This change essentially turned a tax expenditure into direct spending without changing the total amount of government spending…

The American Recovery and Reinvestment Act provides a “natural experiment” to show how transparency differs with tax expenditures and direct spending. Certain renewable energy projects are eligible for an ITC under section 48 of the tax code. Depending on the type of project the developer can get a tax credit for as much as 30 percent of their capitalinvestment. ARRA, however, temporarily changed this to allow developers to get a  cash grant from the U.S. Treasury in lieu of the ITC.

This temporary change has led to several significant outcomes. The primary result is that developers no longer have to be profitable to take advantage of the tax credit. Previously, developers that didn’t have significant tax exposure—which most developers don’t since their projects have yet to make money—had to identify a “tax equity partner” to take advantage of the tax credit. This “tax equity partner” would contribute money to the project and, in return, get to use all the available tax credits. But as fewer companies had tax exposure due to the economic downturn, fewer “tax equity partners” were available, making the tax credit less useful to developers.

ARRA’s transition to a cash grant in lieu of the ITC has made financing renewable energy projects easier in the absence of a lively tax equity market…

Eliminating passive versus active credit limitations for renewable energy

A report put together by Lawrence Berkeley National Laboratory showed that there are many ancillary benefits to issuing cash grants in lieu of an ITC, such as the elimination of the owner-operator and power-sale requirements, which limit freedom of project developers to do financial innovation and find efficiencies, as well as exemption from the Alternative Minimum Tax. I quote from that report here:

Quantitative analysis of these ancillary benefits may also inform the development of a policy agenda for community wind, by revealing which of these benefits are most valuable to the sector.

For example, further analysis of the 10.5 MW project highlights the importance of the 30% cash grant–and especially the relief that it provides from passive credit limitations–for passive investors in community wind projects. Specifically, choosing the 30% ITC over the PTC does not provide much value to passive investors, because the passive credit limitations require all tax benefits (including the PTC or ITC and depreciation deductions) to be carried forward – potentially for many years—until they can be fully applied against the project’s own tax obligations. This delay reduces the present value of these tax benefits. Only if the project elects the 30% cash grant, which is not subject to the passive credit limitations, does it realize the full potential of wind’s temporary ability to choose among these incentives.

Passive investors have not played a significant role in most community wind projects built in the United States to date—perhaps precisely because of the negative impact of the passive credit limitations on the value of the PTC. But if community wind is going to penetrate the broader wind market to any significant degree going forward, it may need to increasingly look to passive investors to finance that expansion. In this light, seeking to extend the very limited window of opportunity for the 30% cash grant—which singlehandedly removes the largest impediment to the participation of passive investors in community wind projects—may be a logical top policy priority for the community wind sector. Alternatively, exempting the PTC and ITC from the passive credit limitations could provide similar relief, though without the other benefits provided by the receipt of cash  rather than a tax credit.

The members of this committee should investigate this potentially fruitful and inexpensive way of promoting investment in community clean energy.

Manufacturing tax credit

One of the most critical things we can do to foster domestic clean energy industries in this  country is realize that demand-side incentives for electricity production is not enough. While incentives that target utilities to encourage them to invest in clean energy infrastructure are an essential component of a comprehensive strategy, they are not enough. You cannot build a market out of demand alone, you must also create incentives for supply. That is why Congress was wise to implement the Section 48C Manufacturing Tax Credits for investments in manufacturing facilities and production capacity for the clean energy equipment and technology.

However, the program, passed under the Recovery Act, was limited to $2.3 billion, and was oversubscribed by nearly a 10-1 ratio. My colleagues at the Center for American Progress have advocated for an expansion of the program, and Vice President Biden in December 2009 announced the administrations plans to add an additional $5 billion to the program, leveraging, an additional $15 billion in private capital.

Congress should recognize that each and every opportunity to create incentives for homegrown manufacturing of clean energy technologies are opportunities to grow our economy and make our indsutries more competitive internationally. Each opportunity should be nourished, and this program should be expanded to provide a stable flow of incentives for a fixed period of time, maybe 5 or 10 years, and then sunset.

Energy recycling, and combined heat and power

The transition away from fossil fuels, though inevitable, will not happen overnight and does not need to. Indeed, the House climate bill envisions the transition occurring over the next four decades. During that time, there are many steps that we can take through the tax code and elsewhere to dramatically increase the efficiency with which we use and conserve our finite  supplies of fossil resources.

One way would be to expand the use of efficient combined heat and power, one of the simplest  and cheapest steps we can take to reduce fossil fuel depence while reducing emisisons and creating jobs. Combined heat and power is a way of recycling energy. Power plants that produce steam, heating, cooling and other industrial facilities can tap into otherwise wasted heat flows to also provide electricity for free. This can increase the energy efficiency of industrial facilities by 50 percent or more, but currently, these technologies receive meager incentives from the government, with industrial energy recycling receiving no incentives whatsoever, and combined  heat and power receiving only 10 percent investment tax credit capped at the first 15 megawatts.

A letter signed by the Center for American Progress Action Fund and more than 60 companies and organizations states:

I urge Congress to pass…Rep. Inslee’s H.R. 4144, which would remove the credit’s limitation to smaller projects by applying it to a project’s first 25 megawatts. We also ask that Congress pass Rep. Tonko’s H.R. 4751, which would provide a 30-percent investment tax credit for highly efficient CHP projects (those with efficiencies above 70 percent) and recycled energy.

According to the Oak Ridge National Laboratory, a large-scale expansion of CHP could provide 20 percent of U.S. generating capacity by 2030, generate $234 billion in new investment, and create nearly 1 million new highly-skilled, technical jobs throughout the U.S. CO2 emissions could be reduced by more than 800 million metric tons per year, the equivalent of taking more than half the current U.S. passenger vehicles off the road.

Encouraging the adoption of these efficient job creating, energy-saving, and emissions reducing technologies would drive innovation and reduce our dependence on fossil fuels.

More strategies

I have made the case that production tax credits, cash grants in lieu of investment tax credits, and manufacturing tax credits are all effective means of leveling the playing field and giving clean energy technologies the opportunity to compete. But why stop there?

The entrenched status quo of fossil energy, as noted earlier, enjoys special tax breaks and benefits for everything, from depleting our nation’s oil reserves to exemptions from capital gains for coal investments to expensing of refining equipment, as noted in the table attached above. By granting these special benefits to fossil tehcnologies and not to clean energy technologies, Congress has distorted the market and inhibiting investment, innovation, and job creation.

Capital-intensive clean energy sources have a different cost-profile than expense-intensive fossil energy, which, given [the] current tax policy makes them artificially more expensive than fossil energy. According to the National Renewable Energy Laboratory:

For example, if a conventional fossil power plant were required to purchase all of its fuel up-front and the fuel were treated as a capital investment from a tax and financing standpoint, the cost of power would be more than double. If this up-front capital investment penalty could be eliminated, [clean energy, in this case concentrating solar thermal] could compete directly with the most advanced and efficient fossil fuel technologies.

Why not allow renewable energy companies to deduct 100 percent of their capital expenditure on land and equipment for clean energy development, the way that fossil companies can currently deduct their spending on imported fuels as business expense?

In addition, there are several other existing clean energy tax incentives that need to be extended. These include:

• Clarifying the rules for the Residential Energy Conservation Subsidy Exclusion (26 USC § 136) to ensure that residential solar thermal or solar electric projects are eligible. As of now, there has been no ruling by the IRS on what exactly constitutes an "energy conservation measure." This should be made as broad as possible to encourage all clean energy technologies.
• Extending the Residential Energy Efficiency Tax Credit (26 USC § 25C) beyond its current deadline at the end of 2010 so that homeowners can plan about the best time for them to upgrade their homes.
• Extend the Residential Renewable Energy Tax Credit (26 USC § 25D), which provides a 30 percent investment tax credit to homeowners installing solar thermal, solar electric, geothermal  heat pumps, hydrogen, or small-scale wind power at their primary residence. Broaden this tax credit to also apply to Commercial properties.
• Strengthen the Modified Accelerated Cost-Recovery System, or MACRS, and Bonus Depreciation (2008-2009) programs (26 USC § 168, 26 USC § 48), by reducing the current five-year depreciation path to 1 year. Or, alternatively, expand bonus depreciation to 100 percent. These alternatives have the same end effect.

We must replace the currently entrenched status quo of permanent tax-incentive life support for old and dirty energy technologies with smart, targeted incentives for cleaner technologies and more efficient practices. But we must also avoid repeating the mistakes of the past: creating permanent subsidies so that the industry does not learn to stand on its own two legs and become competitive internationally. While I argue for a fundamental shift in tax priorities away  from fossil and toward clean energy and efficiency, I also believe that such a shift should come with a transparent and predictable sunset plan, to ensure that we are not creating industries that are permanently dependant on federal handouts the way our current energy system is.

Once we have in place a shrinking cap and a rising price on carbon dioxide emissions, then subsidies should be phased out for most major energy technologies once they achieve a significant market share.

3. Benefits of action

Clean energy jobs are here

The clean energy economy is already producing jobs in a variety of industries and occupations across the country.

• More than 750,000 jobs at more than 70,000 individual firms already exist in industries related to expanding clean energy production, increasing energy efficiency, reducing greenhouse gas  emissions, eliminating waste and pollution, and conserving water and other natural resources.
• These jobs require a wide diversity of education and skills—about 490,000 (65 percent) are in engineering, legal, research, consulting, or government administration sectors; about 197,000 (26 percent) are in renewable power generation, construction, systems installation, and manufacturing sectors.
• Clean energy industries have produced these 750,000 jobs without sustained policy attention or investment. In contrast, the well-established traditional energy sector employs only 1.27 million workers, even after decades of government subsidies.

Clean energy industries are seeing high growth rates

Green jobs consistently post incredible growth rates and are poised to expand on a massive  scale.

• A June 2009 report from Pew Charitable Trusts shows that clean energy jobs grew by 9.1 percent between 1998 and 2007, while total jobs grew by only 3.7 percent.
• Another report shows that the renewable energy industry grew more than twice as fast as the overall U.S. economy.
• And according to the 2009 Green Collar Jobs report from the American Solar Energy Society,  renewable energy and energy efficiency industries can create 37 million jobs by 2030 as long as policymakers support their development.

Investing in clean energy creates new high-quality, local jobs

Investing in clean energy jobs produces exceptional returns in terms of employment possibilities.

• After decades of intermittent support for renewable, Congress finally gave multiyear support to the wind tax credit. At the same time, more than half the states have embraced a renewable electricity standard. These two sustained boosts have helped increase the share of domestically manufactured wind turbine components in U.S. wind farms from under 30 percent in 2005 to over 50 percent last year.
•  A 2009 study by the Political Economy Research Institute at the University of Massachusetts-Amherst in partnership with the Center for American Progress found that investing $150 billion in clean energy produces a net gain of 1.7 million new jobs and reduces the unemployment rate by 1 full percentage point, from the current 9.4 percent down to 8.4 percent. It also creates pathways out of poverty by expanding job opportunities to low-income working Americans, with roughly  870,000 out of the projected 1.7 million clean energy jobs accessible to workers with high school degrees or less.
• A 2004 study done by the nonpartisan Perryman Group in Waco, Texas in conjunction with the Apollo Alliance found that a $300 billion investment in a clean energy future would create over 3.3 million new jobs, spread across every state in the country.

Clean energy is more labor intensive than fossil fuels

Wind and solar photovoltaic industries offer at least 40 percent more jobs per dollar than coal,  while optimized clean energy investments among a number of industries would create over three times as many jobs as investing in carbon-based energy industries.

• The clean energy sector produces more jobs per dollar than the fossil fuels industry because a larger share of clean energy expenditures go to manufacturing, installation, and maintenance—far more labor intensive than the extraction and transportation sectors that comprise most fossil fuel jobs.

Clean energy’s potential is still untapped

We have barely tapped the country’s potential for new energy production, even with all the gains the United States has made in transitioning to a cleaner energy economy.

• The wind energy industry has tapped less than one-half of 1 percent of wind’s potential generation in the United States.
• The four states with the highest potential wind power generation capacity—North Dakota, Texas, Kansas, and South Dakota—are estimated to have a total potential of 4,500 billion kwh, which is enough to power the entire country.
• The United States Department of Energy estimates that if 5 percent of the nation’s energy comes from wind power by 2020, rural America could see $60 billion in capital investment. Farmers and rural landowners would derive $1.2 billion in new income, and see 80,000 new jobs created over the next two decades.

Clean energy jobs can help rebuild the middle class

Clean energy jobs provide employment in numerous sectors throughout the economy and for people of diverse backgrounds and skill sets, but many exist in the manufacturing and construction sectors—traditionally "middle-skill" sectors offering entry into the middle class for workers without four-year college degrees.

• From 2007 to 2008, new construction of residential buildings was down a staggering 39 percent and commercial building construction was down 17 percent.
• Roughly 30 percent of jobs generated by clean energy investments will be in the construction industry. The Renewable Energy Policy Project concludes that a national renewable electricity standard of 25 percent by 2025 could produce over 850,000 new manufacturing jobs at existing manufacturing firms across the country.
• These jobs are evenly distributed across the country.
• Clean energy investments generate jobs that cannot be outsourced throughout multiple  sectors such as construction, installation, and transportation.

Investing in clean energy will save Americans money in the long term

• Savings: The American Council for an Energy-Efficient Economy issued an analysis in July 2009 estimating that H.R. 2454 could save American consumers approximately $750 per household by 2020 and $3,900 per household by 2030.
• Efficiency: A recent report issued by the Political Economy Research Institute at the University of Massachusetts and the Center for American Progress finds that as little as $2,500 invested in energy efficiency retrofits could lead to cost savings to consumers of 30 percent annually on average.
• Renewable electricity: According to the Union of Concerned Scientists, a renewable electricity standard to generate 25 percent of the nation’s electricity from renewable energies by 2025 would create nearly $65 billion of consumer savings in electricity costs by 2025.
• Green Bank: The creation of a Green Bank to help fund the transition to a clean energy  economy could provide favorable financing of renewable resources and allow investors a return on their capital. This will help keep costs low for consumers while making renewable energy competitive with current electricity prices.

Conclusion

Our energy problems and their solution are all interconnected. Sen. Lindsey Graham (R-SC) said in January, “The odd thing is you’ll never have energy independence until you clean up the air, and you’ll never clean up the air until you price carbon.”

We need a serious price on carbon to have any chance of solving our interrelated problems of energy dependence, peak oil, clean energy competitiveness, clean air, and global warming problems. Until we have a shrinking cap and rising price for carbon, though, we need to use our tax code to correct existing market failures and to put clean energy on a level playing field with  fossil fuels. To give businesses more certainty, clean tax credits should be extended for several years. At the same time, we need to stop subsidizing dirty energy.

In the conclusion to my book, Straight Up, I ask, “Is the global economy a Ponzi scheme?” This richest of all human generations has figured out how to live off the wealth of future generations. Investors (for example, current generations) are paying themselves (for example, you and me) by taking the nonrenewable resources and livable climate from future generations. To perpetuate the high returns that rich countries have been achieving in recent decades, we have been taking an ever greater fraction of nonrenewable energy resources (especially hydrocarbons) and natural capital (fresh water, arable land, forests, fisheries), and the most important nonrenewable natural capital of all—a livable climate. The next few years will determine whether or not we are all Bernie Madoffs.

The nation is going to wean itself from fossil fuels in the coming decades and adopt clean energy. That is a certainty. But the question of our time is will we do it fast enough? And will be beat the other major countries in Europe and Asia, especially China, who are racing to be the leaders in this most important of all job creating industries?

Humanity has only two paths forward at this point. As President Obama said in April 2009, “The choice we face is not between saving our environment and saving our economy. The choice we face is between prosperity and decline.” Either we voluntarily switch to a low-carbon, low-oil, low-net water use, low-net material use economy over the next two decades or the post-Ponzi scheme collapse forces us to do so circa 2030. The difference between the two paths is that the first one spares our children and grandchildren and the countless generations untold misery and gives us a serious chance at creating millions of clean energy jobs.

Download the full testimony (pdf)

Joe Romm is a Senior Fellow at American Progress

This tax cut would be financed by making companies pay for their greenhouse gas emissions and eliminating tax breaks for dirty energy—capping pollutants at a sustainable level while returning money to working Americans.

Enter how much you make each year in the calculator below to find out how big your tax cut would be.

Note: The Making Work Pay tax credit is a refundable tax credit of $400 for working individuals and $800 for married couples filing joint returns. The full value of the credit is given to individuals with adjusted gross income of less than $75,000 and couples making less than $150,000. The value of the credit is phased out for individuals making between $75,000 and $95,000 and couples making between $150,000 and $190,000. Those making more will not receive the Making Work Pay tax credit.

As part of his 2010 budget, President Barack Obama has proposed extending the “Making Work Pay” tax cut, a permanent payroll tax reduction for workers and their families. This tax cut would be financed by making companies pay for their greenhouse gas emissions and eliminating tax breaks for dirty energy —capping pollutants at a sustainable level while returning money to working Americans.

This tax cut would benefit all individuals making up to $95,000 and families making up to $190,000, approximately 95 percent of American families who draw a paycheck.

The table below shows the number of families in each state who would benefit directly in the form of lower taxes.

Download this document (pdf)

In June the Center for American Progress Action Fund analyzed the impact of the tax plans proposed by Sens. John McCain (R-AZ) and Barack Obama (D-IL) on John and Cindy McCain’s own personal income taxes and Barack and Michelle Obama’s own personal income taxes. The availability of the candidate’s tax returns at that time offered a unique opportunity to look at the impact of their proposed tax law changes on real, live, wealthy people. Three events of note since then cause us to update that analysis:

• The McCain campaign released Cindy McCain’s partial 2007 tax return late last week; previously only her partial 2006 return had been released.

• Sen. McCain proposed additional tax cuts as part of his Pension and Family Security Plan released October 14. The new cuts are temporary and would be in effect through 2010. They include cutting the top tax rate on capital gains to 7.5 percent from 15 percent, increasing the limit on capital losses, waiving the income tax on unemployment benefits, and new tax relief for retirees.

• Some months ago the Obama campaign clarified its own tax proposal, which results in slightly larger tax cuts for both the McCains and the Obamas than shown in our June analysis.

A fourth tax development that is not included in the new analysis below is the increasing attention being paid to the tax impact of the McCain health care plan. There are two reasons for excluding this from our consideration. First, we don’t have enough information on the health insurance of the McCains and Obamas to do the analysis. Second, for well-off couples like these the tax impact of the health care plan will be small relative to the impact of their tax plans.

So what does our new analysis show? With respect to Cindy McCain’s 2007 tax return, it shows over $1.8 million dollars less in reported income than her 2006 return. The McCains file separate returns and Sen. McCain’s previously released return shows an increase from 2006 to 2007 of $46,995. But with his wife’s loss of $1,869,403, the family income substantially declined—falling to $4,602,437 from $6,066,431 in 2006.

These tax returns, however, give us just a glimpse of what the McCains’ income might actually be. The campaign refuses to release anything but Mrs. McCain’s 1040 tax form, which provides only a fraction of the information she is reporting to the Internal Revenue Service. Most of the McCains’ decline in income between 2006 and 2007 was in “Schedule E” income. Schedule E is a form where income from a wide variety of sources is reported—including trusts and a type of closely held (often family-owned) business.

There is a great deal of income legally sheltered from taxation in the machinations underlying the Schedule E. Without having Mrs. McCain’s complete records it is impossible to know for sure whether the McCains actually did better or worse in 2007 than in 2006—their accountants may just have been able to legally shelter more income. Having that information would be helpful in fleshing out the McCains and Obamas as examples of how the tax proposals affect the well-off. Having a firm grasp of their income would give us a better feel for the equity of their tax proposals.

Sen. McCain’s new Pension and Family Security Plan affects the McCains’ taxes by cutting the top rate for taxing capital gains in half—to 7.5 percent from 15 percent. This brings us to another observation regarding Cindy McCain’s tax returns—it is an example of how the wealthy quite consistently accrue capital gains income as an important source of total income, unlike most people who report capital gains (if at all) only sporadically throughout their lives. In 2006, the McCains reported a total of $743,476 in capital gains. In 2007 they reported $746,395. Had the capital gains rate been 7.5 percent instead of 15 percent in those years Sen. McCain and his wife would have saved $110,310 in taxes over those two years.

The Obamas, who rely primarily on earnings from Sen. Obama’s books and their wages, reported small capital losses for both 2006 and 2007.

The McCain Pension and Family Security Plan, in addition to the lower the rate on capital gains, increases the amount of capital losses that taxpayers can use to offset other income (without getting into the thorny details, the reason these losses are limited is that without a limitation there are huge tax sheltering possibilities). The Obamas would have saved $1,427 from this provision over the two years.

Download the full analysis (pdf)

SOURCE: AP

As we near Election Day, both parties are ramping up their efforts to reach potential voters. The fictional “average Joe” and the more recent  “Joe six-pack” were pushed aside last week to make way for the headline-dominating “Joe the Plumber.” Incorporating the lives of real workers into the presidential debate is essential in both connecting with voters and in demonstrating that a campaign hasn’t forgotten who they should be focusing on. But the dialogue surrounding Joe the Plumber has missed what should be the main point of such stories: how good policies can help workers achieve the American dream.

Stories about the plumber named Joe Wurzelbacher have mostly discussed the presidential candidates’ tax policies in a way that focuses on technicalities and misses the larger story. Under Sen. Barack Obama’s plan, individuals earning an annual income of $250,000 or more would be taxed at a slightly higher rate than they currently are, while those earning less than $250,000 would receive a nice tax break. Sen. John McCain has little to offer in tax cuts for middle- and lower-income taxpayers. Most of the media attention has focused on how profitable the business Joe hopes to buy actually is, and whether he would face a tax increase or decrease under Sen. Obama’s plan.

Others stories have narrowed in on Joe’s business and personal life, questioning whether Joe has a plumber’s license, whether he is really an undecided voter or a Republican partisan, and denigrating his extreme views on other political issues, such as his desire to see Social Security dissolved. Whether Joe is undecided or if Sen. Obama’s tax plan would raise or lower his taxes does matter, but the way the stories have been told misses the main point of how economic policies facilitate or hinder more people from achieving the American dream.

Joe should be seen as the aspirational figure that he is—one whose ambitions are intimately linked with government policy. He wants to get ahead and achieve the American Dream, which for him is to buy a plumbing business.

Government policies matter for this sort of upward mobility. Joe’s profession might, in fact, be a good example of a job that rewards workers, in part because of government policies. Plumbers are skilled workers who receive training that is supported through public policies such as vocational high school and union apprenticeship programs. Jobs like Joe’s pay well and provide income protection in an era of global outsourcing. And perhaps most importantly, plumbing is the kind of job that has a career ladder, where a worker can start off as an apprentice, acquire training and experience to become a journeyman plumber, work up to becoming a master plumber, and then hire other plumbers.

We need to ensure that America has more jobs that can boast these attributes, and that is what the conversation should focus on during election season, as well as after the ballots have been counted, when policymakers will need to help deliver the good jobs that their constituents need. Government policies matter not just for plumbers, but for all of us.

The kind of tax cuts supported by Sen. McCain, which are the centerpiece of his economic plan and disproportionately benefit those with high incomes, have a poor track record. Such tax cuts don’t do a good job of creating economic growth or improving the incomes of most workers. Economic growth rates—average annual real median household income, average real hourly earnings, employment, real investment, and real U.S gross domestic product—were all lower after Ronald Reagan’s supply-side tax cuts in 1981 and George W. Bush’s in 2001-2003, than they were after Bill Clinton’s 1993 tax increases. Federal budget deficits and national debt also increased during supply-side periods, but decreased following the 1993 tax increases.

Government data and anecdotal stories alike highlight the pain that a growing share of America’s workers and their families are feeling. The Census Bureau released data in August detailing that the median household income was 0.6 percent lower in 2007 than it was in 2000 when the previous business cycle ended. The Bureau of Labor Statistics’ latest monthly employment release also announced a decline of 159,000 jobs in September, meaning that the economy has now lost a total of 760,000 jobs in 2008.

In contrast to this misguided emphasis on tax cuts for those with the highest incomes, the Center for American Progress has put forth an agenda for progressive growth that is based on investments in energy transformation, universal health care and education, and improving opportunity and security for workers.

Achieving the American dream takes hard work and individual responsibility, but it also requires good public policy in order to become a real possibility for the majority of workers. Public policies that lead to a productive and adequately rewarded workforce range from increased financing for education at all levels and in a vast array of arenas, to encouraging the creation of “good jobs” in underserved communities. More specific to the current economic downturn, the United States could jumpstart both job creation and the transformation to a low-carbon economy through a Green Recovery program. While such policies do cost money, they are a necessary investment in our nation’s future.

Successful careers and a healthy labor market are the result of public investment in people. It is long past time we commit to making that investment. Failing to do so now will only result in more pain for American workers and the long-term growth of the U.S. economy.

Learn more from the American Worker Project.

With new calls to make them permanent before they expire in 2010, the Bush tax cuts are once again a topic in Congress. As with most well-off people, since 2000 John and Cindy McCain and Barack and Michelle Obama have seen substantial tax cuts. With the availability of these couples’ 2006 tax returns, we can calculate how much they have saved and how much they would save under their own tax plans. The numbers below are based on their 2006 tax returns; if they earn more or less in the future, their benefit would of course change.

Line 1: This is how much the candidates saved on their 2006 tax returns because of the Bush tax cuts. His tax cuts were not fully phased in at this point (the removal of limitations on the deductions and exemptions for high-income taxpayers had not been fully implemented). So, in 2006, McCain made $313,413 because of the Bush tax cuts. The Obamas made $38,169.

Line 2: This is how much the candidates save with the Bush tax cuts fully phased-in—scheduled in law for 2010. The McCains would pay $361,830 less in tax, the Obamas $47,082.

Line 3: This is how much the candidates would save from the McCain plan as compared to tax law in 2000. In other words, this is the value of allowing the Bush tax cuts to become fully effective and become permanent, and also providing the added tax relief that McCain seeks (like repealing the Alternative Minimum Tax). The McCains would save $373,429 under his plan and the Obamas would save $49,392.

Line 4: This is how much the candidates would save from the Obama plan as compared to tax law in 2000. It appears that by preserving provisions that primarily benefit those making less than $250,000, he preserves tax breaks for both himself and McCain to the extent those provisions also apply to higher-income taxpayers.

Line 5: This is the difference between the candidates’ tax liabilities under their two plans. McCain’s plan would give him $367,788 more in tax breaks than Obama’s plan. Obama would save more under McCain’s plan as well—$43,268.

The temporary tax cuts passed early in President Bush’s presidency are again a hot topic as members of Congress—most prominently Sen. John McCain (R-AZ), the presumptive Republican nominee for president—call for them to be made permanent (they are currently set to expire in 2010). The fact that these tax cuts have been a boon to the wealthy is, of course, no secret. When fully phased in, over half of the tax breaks go to the richest 1 percent of taxpayers and over 70 percent go to the best-off 20 percent. Only 15 percent of the tax cuts go to the bottom 60 percent of taxpayers.

These statistics are informative, but it’s also good to have examples of the impact of the Bush tax cuts on real taxpayers, and the consequences of making them permanent—in particular, examples of real live wealthy people whose tax returns can be dissected to discern how the various provisions of the Bush tax legislation affected their tax liability. Generally speaking, well-off taxpayers aren’t, however, inclined to let anyone see their tax returns, which is why we’re often left with just the bare statistics.

Fortunately, however, two prominent married couples have recently revealed a great deal of information from their tax returns: John and Cindy McCain and Barack and Michelle Obama. They’ve provided enough information that the effect of the Bush tax cuts on these two families can be calculated. McCain and Sen. Obama (D-IL), the presumptive Democratic presidential nominee, have also detailed their own tax proposals to allow us to examine how the McCains and the Obamas would fair under their two tax plans.

In the case of the Obamas we have their complete 2006 and 2007 returns. For the McCains we have incomplete information for both years—but enough for 2006 for us to accurately estimate a range of possible savings. Let’s begin the analysis with a look at their current incomes.

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The centerpiece of presumptive Republican presidential candidate Sen. John McCain’s economic agenda is massive tax breaks for the wealthiest individuals and corporations in the United States. The cost to the federal budget: an estimated $300 billion a year, according to the Center for American Progress Action Fund’s analysis of the McCain campaign’s public materials.

Almost two-thirds of these tax breaks, about $175 billion a year, will flow to U.S. corporations, including $45 billion for the 200 most profitable companies in America. When the United States faces so many urgent challenges, at home and abroad, delivering tens of billions of dollars to the most competitive U.S. companies is a particularly egregious misuse of public resources.

Specifically, under the tax plan offered by McCain (R-AZ):

• The largest 200 corporations (as identified by Fortune magazine) in America would get a combined $45 billion-a-year tax break.1 These companies earned more than $500 billion in profits in 2007.
• Eight companies—Wal-Mart Stores Inc., ExxonMobil Corp, ConocoPhillips Co., Bank of America Corp., AT&T, Berkshire Hathaway Inc., JPMorgan Chase & Co., and Microsoft Corp—would each receive over $1 billion a year.
• Like the earmarks McCain criticizes, the corporate tax breaks would “restrict America’s ability to address genuine national priorities.”.2 This $45 billion, for example, would more than pay for key anti-poverty steps, including cutting taxes on low-income workers and families and expanding federal assistance for childcare. Using this $45 billion more wisely we would lift more than 9 million people out of poverty.3

McCain’s Tax Plan

McCain has proposed $300 billion a year in four large tax breaks.4 First, he would slash the corporate tax rate to 25 percent from 35 percent. Second, he would allow corporations to immediately write off—or expense, in tax accounting terminology—the cost of corporate investments in equipment and technology. Third, he would repeal the Alternative Minimum Tax. Finally, he would double the exemption for dependents to $7,000.

The two corporate tax breaks are extremely expensive, costing the U.S. Treasury Department $100 billion and $75 billion a year, respectively. Corporate tax breaks are also extremely regressive. Corporate taxes are ultimately paid by investors, according to the longstanding view of the Treasury and the Congressional Budget Office. As a result, approximately 59 percent of these tax cuts would go to the top 1 percent of households. Only 11 percent of the benefit would go to the bottom 80 percent of households.

Finally, these corporate tax breaks are unlikely to help the economy. They drive up the federal budget deficit, resulting in higher interest rates and lower private-sector investment. Taxes paid by U.S. corporations are among the lowest in the world, measured as a share of the economy. And as Michigan University law professor Revuen Avi-Yonah points out, “experience indi cates that corporate rate cuts, like the temporary reduction in the tax rate on dividends from foreign subsidiaries from 35 percent to 5.25 percent, have resulted in increased profits for U.S. corpora tions but no increase in jobs or overall economic growth.”5

The U.S. corporate tax code is in need of wholesale reform, not just more tax breaks. The nominal U.S. corporate tax rate is among the highest in the world, but actual taxes are among the lowest because of the large number of corporate tax shelters. A balanced reform that reduces the tax rate by removing tax preferences could strengthen the economy without driving up the federal budget deficit or making the U.S. tax code more regressive. But cutting corporate tax rates without taking on special-interest tax breaks—as Sen. McCain wants to do if he becomes president—is an unwise giveaway to corporations.

Tax Cuts for the Fortune 200

The reduction in the corporate tax rate alone would cut taxes for America’s 200 largest companies by $45 billion a year. These companies’ 2007 profits exceeded $508 billion. The average Fortune 200 companies collected $2.5 billion in profits in 2007 (see Table 1 below).

The McCain tax plan also showers additional tax breaks on highly profitable industries (see Table 2 below). It includes $6.5 billion for Fortune 200 energy companies, $6.3 billion for Fortune 200 banks and financial institutions, and $5.6 billion for Fortune 200 merchandising and retailing companies.

These tax reductions are far larger than the earmarks McCain regularly criticizes. Earmarks total about $18 billion a year, according to Taxpayers for Common Sense.6 And there are only about $9 billion a year in wasteful earmarks that could be eliminated, according to the Heritage Foundation.7

In short, McCain’s tax breaks for the Fortune 200 alone amount to more than twice current annual earmarks and more than four times the amount of wasteful earmarks he could eliminate, as identified by a prominent conservative think tank.

Conclusion

Over the past eight years, U.S. corporate profits have grown along with the U.S. economy while workers’ wages have stagnated. But the centerpiece of Sen. McCain’s economic policies is a huge break of $300 billion to the nation’s wealthiest individuals and most profitable companies. These misdirected resources instead could be used to meet the needs of struggling families. For example, they could help lift more than 9 million families out of poverty.

Tax Breaks by Corporate Sector Under McCain’s Tax Plan
Fortune 200 Companies by Sector	McCain Tax Cut
Energy, Oil & Utilities	$6.5 billion
Banks & Finance	$6.3 billion
Merchandising/Retail	$5.6 billion
Insurance	$5.0 billion
Media & Telecom	$4.5 billion
Computing & IT	$4.3 billion
Health Care	$4.0 billion
Heavy Industry	$3.1 billion
Consumer Goods	$2.0 billion
Food & Agriculture	$1.7 billion
Misc. Services	$1.0 billion
Transport Services	$1.0 billion

Methodology

The estimates of corporate savings were calculated based upon information presented in the companies’ most recent 10-K filings with the Securities and Exchange Commission, which include audited financial statements.8 The figures reported on tax returns—which are not made public—may differ because corporations employ different methodologies for calculating income for accounting and tax purposes. The estimates are based on the financial statements’ reported current and deferred taxes paid in 2007 to the federal government for income earned from U.S. operations.

The figures present each corporation’s estimated savings from reducing the corporate tax to 25 percent from 35 percent. They do not include savings from Sen. McCain’s expensing proposal because there is no reliable way to estimate how those savings will be distributed across companies. They also exclude U.S. taxes on income earned from foreign operations. Finally, the figures do not include any offsetting tax increases resulting from McCain’s promise to eliminate corporate tax subsidies because the campaign has not presented specific proposals.

Several companies reported that 2007 taxes were negative (known as a “tax asset”). Companies with a “net operating loss” can use those losses to offset profits earned in the prior two years and receive a refund of taxes paid in those years. Net operating losses can be caused by business factors or by tax subsidies such as accelerated depreciation. Presumably the McCain proposal would not alter corporations’ ability to use net operating losses to offset prior years’ tax bills, and therefore these companies’ potential savings under the McCain plan are assumed to be zero.

The estimates are based on 2007 figures. The actual effect of the McCain proposals will depend on corporations’ future performance. Figures may not add due to rounding.

Endnotes

1. As identified by Fortune magazine. Fortune, “Fortune 1000,” May 5, 2008.

2.John McCain, “McCain Tax Cut Plan,” John McCain for President 2008.

3.The Center for American Progress Task Force on Poverty, “From Poverty to Prosperity: A National Strategy to Cut Poverty in Half” (Washington: Center for American Progress, 2007).

4.Based on information publicly available from the McCain campaign website and news accounts. The Tax Policy Center has recently released an analysis of McCain’s plan, apparently based on new information from the McCain campaign that clarifies and in at least one instance contradicts the campaign’s public policy documents. Our analysis continues to rely on the public materials, which we regard as authoritative.

5.Reuven Avi-Yonah, “John McCain’s Corporate Tax Agenda: A Critical Examination” (Washington: Center for American Progress Action Fund, 2008).

6.Taxpayers for Common Sense, “Taxpayers for Common Sense Releases New Earmark Database,” February 14, 2008.

7.Michael Dobbs, “McCain’s Fantasy War on Earmarks,” Washington Post, May 23, 2008.

8.Financial data compiled from “Form 10-K: Notes to Consolidated Financial Statement,” SEC filing of each company. Please see individual company websites for further details on filings.

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Senator John McCain (R-AZ) has proposed two major changes to the corporate tax code: cutting the corporate tax rate from 35 percent to 25 percent and allowing corporations to deduct the full cost of investments in technology and equipment in the first year, an accounting process known as expensing. The first proposal aims to enhance U.S. economic competitiveness, create jobs, and increase wages. The second proposal aims in particular to boost capital expenditures and “reward investment in cutting-edge technologies.”

Both measures, if enacted by Congress, would greatly alter the role of corporate revenues in our tax system. Corporate taxes account for a significant share of the federal government’s revenues (about 14 percent in 2007), financing critical investments in national defense, infrastructure, and human services. The corporate tax is crucial for the overall progressivity of the tax system, prevents individuals from sheltering income in corporations, and enables some measure of regulatory control over corporations.

There are major problems with the corporate tax code, of course, such as the provisions that encourage U.S. companies to locate jobs overseas. Reforms of the tax code to address these problems—including proposals that would close loopholes and lower the corporate tax rate—are worthy of serious consideration. Some changes, however, would make these problems worse.

This paper examines Sen. McCain’s corporate tax proposals on tax sheltering, growth and competitiveness, equity, and cost. In each case this proposal raises significant concerns. Specifically:

• Allowing corporations to expense their investments in new equipment and technology, in the context of the current tax code, invites massive tax sheltering.
• Cutting the corporate tax rate to 25 percent from 35 percent would also drain the ƒƒfederal treasury, without improving the competitiveness of the United States as a place to do business or of its corporations in the global marketplace.
• Reducing the corporate rate will overwhelmingly benefit upper-income taxpayers. ƒƒ
• Combining rate cuts and expensing would be enormously expensive, reducing corporate revenues by as much as 75 percent.

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[John McCain] campaigned on being very good on taxes in this election cycle… that he will continue to make [the Bush tax cuts] permanent, that he will veto any tax increase, period, that he wants to cut the corporate rate from 35 percent to 25 percent, that he wants to have full expensing, that he wants to abolish the AMT …. In addition to being the Americans for Tax Reform’s entire agenda, that is a very pro-growth set of policies he has put forward, and he articulates why they are important.”
    —Grover Norquist, President, Americans for Tax Reform, February 27, 2008

In 2001 and 2003, Sen. John McCain (R-AZ) opposed the Bush tax cuts, arguing that they came “at the expense of lower- and middle-income Americans” and were too costly in a time of war.2 As a presidential candidate, however, McCain not only embraces the Bush tax cuts but also proposes massive additional tax cuts that are even more tilted against the middle class.

To assess the McCain tax proposals, we begin by defining five key characteristics of the Bush tax cuts: they cost an enormous sum, skew benefits to the wealthy, favor capital over work, protect tax shelters, and increase federal budget deficits. We then assess the McCain proposals against these five benchmarks. Finally, we compare both the Bush and McCain plans with the conservative tax agenda known as “Five Easy Pieces” advanced by Grover Norquist’s Americans for Tax Reform and other conservative tax groups.

Our analysis suggests that the McCain plan shares five key characteristics of Bush policies. First, it is enormously expensive, costing more than $2 trillion over the next decade and essentially doubling the Bush tax cuts. Second, the McCain plan would predominantly benefit the most fortunate taxpayers, offering two new massive tax cuts for corporations and delivering 58 percent of its benefits to the top 1 percent of taxpayers. The Bush tax cuts provide 31 percent of their benefits to the top 1 percent of taxpayers.

Third, the McCain tax plan continues the shift of the tax burden from investment income onto earned income. Fourth, the plan not only fails to address current tax shelter problems in the tax code but in fact will lead to increased sheltering. Fifth, McCain cannot pay for his tax cuts without massive reductions in Social Security, Medicare, or other key programs that benefit the vast majority of Americans.

In the final analysis, we conclude that the McCain tax plan is essentially a continuation of the agenda articulated by Norquist and others to achieve piecemeal but radical changes to the U.S. tax code under the heading of “Five Easy Pieces.” These changes require huge spending cuts, shift the tax burden away from capital and onto labor, and come “at the expense of lower- and middle-income Americans.”

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Conservatives have won electoral gains over the past thirty years by courting an uneasy, yet effective fusion of right-to-life social conservatives with economic conservatives who support tax cuts and a reduced government safety net for the needy. For thirty years, the differences between these two factions have largely been masked, with many observers assuming that socially conservative white evangelicals actually support a conservative economic agenda.

Not all of Huckabee’s economic views, of course, are progressive. He supports, for example, a regressive consumption tax that would seriously empty the wallets of many low- and middle-income white evangelicals he is now courting on the campaign trail. Still, Huckabee is running against the standard conservative line on the economy. He argues that conservatives need to "quit being a wholly-owned subsidiary of Wall Street … or else we’re not going to win another election for a generation." He has supported increasing the minimum wage and expanding health insurance to more children—positions that put him at odds with traditional economic conservatives.

While commentators have increasingly noted Huckabee’s economic views, few have linked his message with his ability to win white evangelical voters or noted what this may mean for the future of the conservative movement. Since the emergence of the Religious Right as a defining voice in the conservative movement in the late 1970s, most evangelical leaders (with some notable exceptions like Jim Wallis) have generally supported cutting taxes and reducing government services.

Most Christian Right leaders, observes Michael Lienesch, a professor of Political Science at the University of North Carolina, "combine conservative economics and conservative religion in a multiplicity of ways, so that in the end the two are almost indistinguishable."

Indeed, Pat Robertson argues that, "To everyone who has shall more be given," while the late Jerry Falwell argued that capitalism was "part of God’s plan for His people." Ralph Reed, former head of the Christian Coalition, is known for his fervent support of tax cuts.

Yet these evangelical leaders no longer command the following they once did. More importantly, they never accurately reflected the economic views of most evangelicals, who are not married to economic conservatism but rather boast a wide range of views on economic issues. There are even quite a few economically progressive evangelicals.

In my research, I have found that people who are pro-life are just as likely as people who are pro-choice to support progressive economic policies, such as increasing benefits for the unemployed and reducing income inequality. Similarly, sociologists like Robert Wuthnow and Stephen Hart have found that religious conservatism is not linked to economic conservatism.

Most evangelicals today are not necessarily wed to a pro-business agenda. According to a January 2007 poll by the Pew Research Center, more than two thirds of white evangelicals agreed that business corporations make too much profit. Further, almost three quarters (72 percent) of them said there is too much power concentrated in the hands of a few big companies. These views are largely anathema to those held by the corporatist wing of the conservative movement.

There is also evidence that on a few particular issues white evangelicals tend to embrace a more progressive economic outlook. According to the same Pew survey, 78 percent of white evangelicals favored increasing the minimum wage from $5.15 to $7.25 an hour, and 59 percent supported the government guaranteeing health care for all citizens.

This evidence suggests that Mike Huckabee’s electoral success and popularity is not just a product of his social conservatism. In fact, he more accurately than other, more economically conservative candidates, captures the economic concerns of many evangelical voters.

More fundamentally, Mike Huckabee’s success highlights the underlying tensions in the conservative movement. The fusion of economic and social conservatives has been a ticking time bomb for nearly 30 years. Economic and social conservatism do not naturally fit together. Their fusion has been a marriage of convenience.

Now, evangelical voters seem to be leaving this marriage of convenience with every vote they give to Mike Huckabee — a candidate who does not force them to choose between their social and economic views. As this election season develops, this may become known as the moment when the uneasy coalition between social and economic conservatives finally breaks down.

The primary purpose of the tax code is to raise the revenue needed to fund current national priorities and to prepare for long-term goals. At CAPAF, we believe that America deserves a fair, simple, and pro-growth tax system that rewards work, creates opportunity for all, and allows the nation to meet vital national challenges.

The “Cleanse the Code” statement reiterates many of these themes, insisting that the tax code promote basic principles of simplicity, opportunity, and fiscal responsibility. At the Center we also believe that tax changes over the last several years have moved in the wrong direction—making the tax code less transparent, less fair, and more susceptible to exploitation by special interests.

The tax code now provides significant preferences for income derived from accumulated wealth, while at the same time placing a greater share of the tax responsibility on the work of the middle class and still leaving the nation with a significant budget deficit. A comprehensive tax reform package must reverse these trends and create a tax code that is simple, fair, and that raises adequate revenue to fund out national priorities.

A revised tax code should allow the middle class to get ahead and should create opportunity for Americans of all income levels. For more information, see the

“Cleanse the Code” Statement on the website of the National Taxpayers Union.

For more information on the Center’s own tax reform proposals, see:

• Principles and Proposals for Tax Reform
• A Fair and Simple Tax System for our Future
• Options for Tax Reform
• Creating a Fairer Tax Code

Contact our tax expert, John Irons, for additional information and comments.

To contact one of our experts please call/e-mail Sean Gibbons, Director of Media Strategy, at 202-682-1611 or sgibbons@americanprogress.org.

Turnover elections traditionally bring with them both new hope and great expectations. With their votes, the American people have asked for change in Washington, tired of the partisanship and paralysis of the past. When elections are about change, the electorate, not surprisingly, actually expects change to occur.

The American people expect action and results. According to a post-election USA Today poll, approximately half of respondents said they expected the president and the Congress would cooperate with each other in the coming year.

While it received little attention in the media coverage of the 2006 campaign, the Congressional Democrats put forward a specific policy agenda that begins to implement real change to address our security failures and alleviate the economic pressures on the middle class and least fortunate. The House Democrats’ 100-hour agenda provides the right start for the 110^th Congress, and should pass with bipartisan support. Congress cannot credibly set out to address the nation’s problems until it fixes its own, and the ethics and pay-as-you-go reforms will go a long way to restoring faith in government. Among its other important agenda items: raising the minimum wage, giving government the tools it needs to lower prescription drug prices for our nation’s seniors, replacing tax breaks for polluting oil companies with clean energy technologies, lowering the cost of college, and promoting stem cell research. These are critically needed fixes that will go a long way to securing the trust of the American people in Congress’ ability to work for them and hopefully begin to build a better working relationship between Democrats, Republicans, and the president that can bring effective new policies to our governing.

This past election, Americans asked Washington to stop ignoring our country’s problems and get about the business of solving them. Progressives have an opportunity to show that their governing philosophy addresses real people’s concerns. The righted ship of Congress should leave Americans feeling that progressives have delivered change that clearly opens the doors of opportunity to a growing middle class, reawakens our conscience, and commits us to the common good, reforms government, and restores the image of the US as a nation of both strength and a force for progress.

The Center for American Progress Action Fund offers our recommendation for new ideas and policies that the 110th Congress should take on and enact before the August recess, after the first 100 hours. In the weeks and months after those first hours, Congress will have an opportunity to demonstrate progress on fixing the problems Americans face. Indeed, we argue that instead of following the traditional Congressional course of an initial burst of activity followed by weeks and months of less action, the Congressional leadership can show the American people it continues to work to meet their needs by continually passing legislation in the spring and summer.

While restoring order and accountability to the day-to-day business of the Congress is essential, a sense of urgency needs to become palpable in order to meet expectations set by the midterm elections. Internal and external deadlines with committees should be set on key deliverables. Doors should be opened to include the minority party in an unprecedented fashion. And recognizing the Senate may take longer to work its will than the House, the Senate leadership can continually promote the progressive agenda issues by pushing proposals onto the floor.

The proposals that follow are concrete policy changes that Congress could pass in those months to demonstrate that progress is at the core of a progressive philosophy. By continually moving new proposals through the legislative process, the Congress can also dominate news coverage and communicate its intention to hold equal sway with the president on the domestic and foreign policy agendas of the country.

These policies would address aspects of the most pressing of our nation’s problems—Iraq and national security, energy security, economic policy, health care, education, and the environment. We urge and underscore the need for dialogue across the aisle in addressing these issues, and especially in developing a plan for a swift and successful conclusion to the US presence in Iraq. The American people are looking for bipartisan agreement on that plan.

The opportunity voters have given progressives to lead cannot be overstated, just as the midterm election results cannot be over read. We have been given the chance to prove that our ideas and policies can help solve the nation’s problems, but we also shoulder the responsibility to repair the damage our union has sustained at the hands of radical conservative ideologies. It is an opportunity that should not be wasted.

• Read the agenda

Increasing tax complexity has direct costs in terms of the amount of time it takes for individuals and businesses to fill out forms and to keep track of all the records necessary to file.

More importantly, complexity in the code also erodes the perceived fairness of the system. A more complicated system leaves taxpayers feeling that their fellow citizens might be taking advantage of the system, and that they them- selves would do better if only they had made different choices, been a little less honest, or paid for a better tax accountant.

While there is no perfect measure of tax complexity, there are many indications that the tax code has become increasingly complicated and in need of reform. Below are some measures of the number and complexity of IRS forms, the amount of resources devoted to collecting taxes, the number of tax expenditures, tax lobbying statistics, and the total compliance costs. . . by the numbers.

Read the full report (PDF)
Accompanying Graphic  (PDF)

There has been great consternation in recent weeks over a provision in the omnibus appropriations bill that would allow certain Appropriations staff access to individual tax returns and would exempt them from criminal penalties for revealing the contents of those returns.

That appears to be an outcome that no one was either aware of or intended. The omnibus is now being held in the Senate until the offending language is stricken, and the privacy threat it posed is now certain to be blocked. What remains, however, is what this episode tells us about the current process by which the Congress is doing the people’s business.

Since early last spring it has been obvious that the “regular order” for appropriations bills would once again be ignored. Allowing the individual appropriation bills to be considered separately, on their own merits, has become so unusual that it is difficult to even say that it is the “regular order.”

Instead, Congress goes through a pretend exercise each year in which only a handful of the appropriation bills are actually passed as free-standing legislation. In many instances major bills are not even brought to the floor for public debate in one or both houses. Many of the bills that are debated on the floor differ substantially from the final versions brought back in the many-thousand-page conglomerations that appear only hours before the Congress is scheduled to go home.

Thus ensues a mad scramble each fall involving thousands of budget and policy decisions that are hurriedly wrapped into one massive piece of legislation – legislation that no single person could begin to read, much less comprehend, in the time between its final assembly and its consideration on the floor of the two houses.

And even if one were able to read and understand these documents, an individual Member could do little about any item he or she disagreed with. Conference reports now present elected Representatives with only one choice: “Do you want to fund the government for the coming year or don’t you?”

Over the past decade, Congressional leaders have learned that amalgamating such a massive amount of must-pass legislation into one package makes it possible to not only do most of the work of an entire session in one fell swoop but to also pass numerous agenda items that do not have majority support – and which simply could not survive in any other form.

In other words, these omnibus appropriation bills have become a tool by which the democratic principles that underlie both Houses can be circumvented.

But such actions have consequences, and the provision discovered after this year’s omnibus cleared the House is a perfect example. The back-room process of putting together a 3,000-page bill in a matter of days or weeks is necessarily a process preformed almost exclusively by staff. Conferences serve merely as pro forma meetings at which massive amounts of paper are plopped before Members purporting to explain the decisions already made by staff. After a few “opening” statements, the conference chairman typically gavels the conference into recess and the members of the conference are asked to sign the report.

Nothing underscores the risks inherent in this approach more than the claim by the chairman of the Treasury-Transportation subcommittee that he had no idea that the offending provision had been included.

It might be understandable if he’d claimed that the impact of the provision was contrary to his understanding – but he insists that he had never even heard of it. That provides a dramatic contrast with the days when the full membership of each House and Senate subcommittee, and not just the chairmen, sat for days, if not weeks, to hash out their differences.

Of further concern is the fact that the provision Chairman Ernest Istook (R-Okla.) professes never to have heard of directly addresses his ability to conduct oversight and to assure his colleagues that the money he is asking them to take from the Treasury is actually being spent for the purposes intended.

His subcommittee appropriates more than $10 billion a year for the Internal Revenue Service, but currently neither the chairman nor his staff can enter Internal Revenue Service facilities to determine how these funds are spent. This was the issue that the offending language was attempting to address – but it appears to be an issue that the chairman was either unfamiliar with or uninterested in resolving.

In addition to taking policy choices out of the hands of the people who were elected to make them, the omnibus process has another consequence: It creates a high probability that serious and embarrassing mistakes will be made in compiling the final product.

The offending provision was introduced in an all-night staff negotiation and was discussed between 3 and 5 a.m. on the day before the final 3,000-page document was assembled. If it is the only screwup in this package, it would be a miracle. The language in question replaced an earlier version that would have granted appropriations staff the same access to tax returns as staff of the Ways and Means Committee now holds.

Appropriators do not write the revenue code, and they do not oversee IRS interpretation of the code. As a result, such authority would be unnecessary and inappropriate. But appropriators do pay the salaries of 100,000 IRS employees. They are responsible for paying hundreds of millions of dollars in IRS contracts and for the leasing of tens of millions of square feet of office space. The revised language now at the center of the controversy was drafted by IRS with instructions to narrow the authority in the earlier version and simply permit appropriators to enter IRS facilities.

Apparently no one realized, during those early morning hours, that not only did the new language fail to restrict access to tax returns, but it also inadvertently exempted appropriators from the criminal penalties to which the U.S. Code subjects any other government employee with similar access to tax returns. While the flawed language should have been spotted, the circumstances in which it was added make such mistakes almost inevitable.

Why do we conduct the people’s business this way? Some say it’s that Members of Congress have become too lazy to do their own work, and there may be some instances in which this is true. But my experience indicates that the vast majority of Members of both parties would love to revert to the old system in which the people elected to make these decisions actually do. I also know that nearly all of the staff who have been called on to participate in these exercises are deeply troubled by the process that has evolved.

The reason the old system of legislating no longer works is that the current leadership has not only assumed the role of passing the legislation required of Congress, but has also taken on the responsibility of insuring that the content of that legislation is consistent with a specific ideological criteria that is often not the will of a majority in the House.

They have committed to conservatives within the Republican Conference that legislation sent to the president will be consistent with the views of a majority of the Conference. On dozens of issues ranging from trade with Cuba to Canadian drug imports and the raising of the minimum wage, the majority position in the Republican Conference is not the majority position of the full House. Preventing the House from producing legislation that reflects the views of its Members requires circumventing a body of rules and procedures developed in the past 215 years.

The House was intended to be the centerpiece of our democracy. It can again function as a democratic institution if we return to the “regular order.” When even subcommittee chairmen don’t know the content of the legislation bearing their own name, the role of elected representatives has been diminished to the point that ordinary citizens can have little confidence that their views have any weight in decisions made by Congress.

Scott Lilly is a senior fellow at the Center for American Progress. In 1994 he served as clerk and staff director of the House Appropriations Committee. From 1995 to this past March he served as the committee’s minority staff director.