$438 Billion Drop in Capital Gains Reported in 2008

December 17th, 2010

Every so often, the real world makes a mockery of the neat figures modeled by Congressional budgeteers.  In 2008, U.S. individual taxpayers reported $438 billion less in capital gains than they did in 2007.   This change, reported today by the IRS, resulted in about $65b less revenue than in 2007.  

The other significant components of individual taxpayers’ gross income either dropped slightly, or picked up slightly, but the capital gains figure dropped a whopping 48%.  To put this in perspective, the total drop in adjusted gross income from 2007 to 2008 was $425b, less than the drop in capital gains.   The biggest component of AGI – – wages and salaries – – rose by a meager 1.9%.  

In 2007, capital gains accounted for 10% of AGI.  In 2008, it had dropped to 5%.  

What this illustrates is that federal revenue has become sensitive to the performance of capital markets.  When the stock market crashes, as it did in 2000 and in 2008, it causes a major impact on federal revenue in the following year.

House OKs Tax Bill, Enacts Payroll Tax Holiday

December 17th, 2010

The House last night voted 277-148 to approve the $856 billion bipartisan tax compromise negotiated at the White House, sending the bill to the President for his signature and ending more than a year of uncertainty about whether Congress would extend President Bush’s 2001 and 2003 tax cuts or allow some rates to increase to their pre-2001 levels.  The bill also extends for 12 months the 0% capital gains rate for investment in small business stock and enacts a one-year payroll tax holiday  that will save wage earners up to $2,136 in 2011.  

Households with more than one wage earner could save substantially more, because the holiday applies to each wage earner.   For example, a household with two wage earners, each earning $80,000 would save $3,200 or $266 per month in payroll tax.   Under a new IRS policy announced today (IRS Notice 1036), these amounts will start appearing in employees’ paychecks no later than January 31st.

The tax bill also retroactively extends and increases the AMT exemption levels for 2010 and extends them through 2011 at a cost of  $136 billion, and extends nearly all other expiring tax provisions until the end of 2011.

Senate Passes Compromise Tax Bill

December 15th, 2010

By a vote of 81-19, the Senate passed a bill to extend the EGTRRA and JGTRRA sunsets until 2012, increase the estate tax exemption level to $5 million, reduce the maximum rate to 35%, enact a 2% payroll tax holiday for 2011, and extend expiring tax provisions. The House Rules Committee is expected to meet later today to pass a rule for consideration of the bill in the House. Reportedly, the House is considering allowing an amendment on the estate tax provisions of the bill. Any changes that the House makes would set up a new vote in the Senate before final passage.

WH Compromise Wins Cloture

December 13th, 2010

The Senate today voted to end debate on the bipartisan tax compromise negotiated at the White House, setting the stage for a final Senate vote within 30 hours. The final vote was 83-15, with Sens. Bingaman, Brown, Coburn, DeMint, Ensign, Gillibrand, Hagan, Lautenberg, Leahy, Sanders, Sessions, Udall, and Voinovich voting “no.”  Sens. Merkley and Wyden missed the vote.

New Republican W&M Members

December 10th, 2010

Incoming Chairman Dave Camp announced that the following Republican members (listed alphabetically) will join the Ways & Means Committee in the 112th Congress:

Rick Berg (ND)
Diane Black (TN)
Vern Buchanan (FL)
Jim Gerlach (PA)
Lynn Jenkins (KS)
Chris Lee (NY)
Erik Paulsen (MN)
Tom Price (GA)
Aaron Schock (IL)  
Adrian Smith (NE)

The Democratic side of the panel will shrink, but the decisions on who will leave have not yet been announced.

Bipartisan Tax Compromise Moving Forward

December 10th, 2010

House and Senate tax writers last night introduced bipartisan legislation to carry out the terms of the tax compromise negotiated earlier this week between top Republican and Democratic negotiators at the White House.   The legislation was introduced late on December 9th as S.A. 4753 to H.R. 4853.  The Senate Majority Leader filled the amendment tree and filed cloture, setting up a vote on whether to end debate at 3pm on Monday.  At this point, it is unclear precisely what amendments would be allowed, but the legislation is expected to win 60 votes.  After that, there would be a maximum of 30 hours of debate, a vote on final passage, and the bill would go back to the House.

White House Compromise on Shaky Ground

December 7th, 2010

Without support from the Senate Democratic leadership, the compromise announced by the White House on December 6th, the comprehensive tax deal faces an uncertain future.  The Senate Democrats are meeting today for their regular caucus meeting, and the outcome of that meeting could be decisive.  If Senate Democrats agree to go along with the White House, the Senate could wrap up business early and members could return home for the holidays.  If not, the compromise may be doomed.  The most likely outcome is that the compromise will be changed as Senate Republican and Democratic leaders negotiate a structure for floor consideration of the bill.

WH Considering Payroll Tax Holiday

December 6th, 2010

According to congressional staffers involved in bicameral negotiations with the White House aimed at avoiding expiration of current individual income tax rates, the White House is offering the option of a 2% reduction in payroll taxes for 2011 as an alternative to extension of the Making Work Pay Credit. It is unclear whether the reduction would apply to both sides of the payroll tax or would be limited to the employee’s liability. Another proposal on the table is 100% expensing for small businesses in 2011. The White House has announced a press conference at 6:10pm EST.

House Members Jockey to Join W&M Panel

November 11th, 2010

Although the Ways & Means gavel is almost certain to go to Michigan Representative, and House Republican Steering Committee member Dave Camp, an aide to incoming Speaker John Boehner says that the Steering Committee won’t formally make that decision until the new Congress convenes.

In the meantime, at least eight House Republicans have been mentioned as candidates for one of the 12 to 14 Republican seats made available by the November 2 election. Among the best known candidates are Michelle Bachmann (R. Minn.), the founder of the Tea Party Caucus in the House, who recently abandoned her bid to become Republican House Conference Chairman on November 10th.

Rep. Bachman has sought previously to join Ways & Means, citing her background as tax litigator for Treasury and the lack of a Minnesota representative on the panel. However, the leadership could solve the Minnesota representation problem by appointing Rep. Erik Paulsen (R-Minn.), a former aide to Jim Ramstad who served on the panel until 2009.

Another well known potential candidate, should he decide to step down from House Financial Services, is Kevin McCarthy (R.-Calif.). Rep. McCarthy was chief deputy whip in the last Congress and is a member of the House Republican Steering Committee. Rep. McCarthy played an important role in the November elections as the top recruiter for Republican candidates for the National Republican Congressional Committee. If McCarthy becomes the Majority Whip, as expected, he could join the panel and then take a leave of absence.

Other members mentioned as possible candidates include Rep. Vern Buchanan of Sarasota, FL. Leadership sources say they are interested in maintaining a Florida representative on the panel, now that Rep. Ginny Brown-Waite is retiring. Rep. Connie Mack, also from Florida, is also a candidate.

Two CPA-Republicans also have been mentioned as possible candidates: Rep. Lynn Jenkins (R.-Kan.) and Michael Conaway (R-Texas). Finally, Rep. Tom Price, the Republican Study Committee Chairman a former surgeon and vocal supporter of the Fair Tax could be interested in the panel as well.

Three Tax Options

November 10th, 2010

Former Clinton Chief of Staff Erskine Bowles and former Republican Senator Alan Simpson, the co-chairs of the President’s National Commission on Fiscal Responsibility and Reform (the “deficit commission”) have released a report that broadly outlines three tax overhaul proposals. These are “The Zero Option,” “Wyden-Gregg Style Reform,” and “Tax Reform Trigger.”

Option 1: The Zero Option

Under the Zero Option, there would be three income tax rates – – a bottom, middle, and top rate — and one corporate rate. Capital gains and dividends would be subject to ordinary income tax rates, and the AMT, the Pease limitation on itemized deductions, and the Personal Exemption Phaseout (PEP) would be eliminated.

Many tax expenditures also would be eliminated, but the extent of elimination would depend on the rates.

The key concept behind the zero options is that the three individual rates, and the corporate rate, would be adjusted to raise a target amount of revenue, based on the value of tax expenditures eliminated.

Under the lowest-rate option in which all tax expenditures are eliminated, the top rate would be 23%. It’s unclear at what income level the lower rates kick in, but they are listed as 8% and 14%.

Recognizing that it is totally unrealistic to propose eliminating all tax expenditures, the Co-Chairs map out three scenarios in which a range of rates is presented next to a list of tax expenditures preserved.

In the scenario closest to the status quo, in which the CTC, EITC, the mortgage interest deduction, and health and retirement benefits are preserved, and we shift to a territorial tax system, the rates are 13%, 21%, and 28% respectively.

Option 2: Wyden-Gregg Style Reform

Using the Wyden-Gregg tax reform proposal as a starting point, the Co-Chairs would repeal AMT, PEP, and Pease, as under the Zero Option proposal. They would establish three income tax rates: 15%, 25%, and 35%, and they would repeal or limit a number of tax expenditures, including:

* the deduction for state & local taxes;
* cafeteria plans;
* the deduction for miscellaneous itemized deductions;
* limit mortgage interest deductions to $500k of borrowing with respect to a primary residence;
* no interest deduction for home equity loans;
* establish a floor of 2% of AGI for charitable deductions;
* cap the exclusion for employer provided healthcare at the actuarial value of the standard -option FEHBP plan;

The Wyden-Gregg based proposal also would reduce the corporate rate to 26%, permanently extend the research and experimentation credit, and eliminate or modify several business tax expenditures:

* the domestic production deduction would be eliminated;
* corporations would be required to use FIFO accounting, instead of LIFO;
* various energy tax preferences for the oil & gas industry would be eliminated; and
* the proposal would modify depreciation rules.

As in the Zero Option plan, the Co-Chairs propose to shift to a territorial international tax system.

Option 3: Tax Reform Trigger

The Tax Reform Trigger option envisions a legislative “trigger” designed to prompt the tax writing committees of Congress to enact comprehensive tax reform by the end of 2012.

If the tax writing committees fail to act, the trigger would impose a “haircut” reduction across-the-board for itemized deductions, the exclusion for employer-provided healthcare, and general business credits.

The haircut would take effect in 2013, and would limit the deductions and exclusions individuals could take to around 85% of the statutory amount by 2015. Corporations would be limited to claiming a percentage of their general business credits.

The haircut would be designed to increase over time if tax reform was not enacted.

Other Proposals

Elsewhere in the document, the Co-Chairs make other important tax proposals. First, they would raise the gas tax by 15 cents/gallon over time, beginning in 2013. The increased revenues would be dedicated to the highway trust fund.

In addition, the Co-Chairs would phase in an increase in the wage-base ceiling for Social Security payroll taxes. They do not specify how high it would go. Rather, they specify that the payroll tax base should capture 90% of wages by 2050, up from 86% under present law. That would equate to a substantially higher ceiling than the current OASDI ceiling of $106,800.

Finally, the Co-Chairs would change the way inflation is measured for a wide variety of purposes, including the regular income tax bracket increases. The plan would be to use chained-CPI government wide, instead of CPI. Generally, this would result in lower bracket increases and smaller benefit increases in Social Security and Medicare.

In general, the Co-Chairs proposals are designed to lower income tax rates, simplify the tax code, broaden the base, cut tax expenditures, improve compliance, enhance the competitiveness of U.S. firms, and cut the deficit.

When he introduced the proposal, Co-Chair Alan Simpson remarked that the deficit commission had “harpooned every whale in the ocean.” And, undoubtedly, the co-chairs are bracing for a stormy ride on the high seas, powered by some very aggrieved sea mammals.