In the news

Withholding Tax Update
The Senate voted Monday to take up the "3 percent withholding" bill that would repeal the tax provision that mandates federal, state and local governments to withhold 3 percent of nearly all of their contract payments beginning in 2013. The bill is similar to a House measure approved last month. The legislation’s $11 billion cost in lost tax revenue would be paid for by closing a loophole in the health care law that Republicans argue allow some middle-class Americans to qualify for Medicaid. The measure could get a vote on final passage as soon as Thursday if an agreement is reached to do so. More on this story.

Republicans' "revenue" deal
Republicans want to “raise” revenue by limiting tax deductions, capping write-offs on charities, state, and local taxes, and mortgage interest payments as a percentage of each tax filer’s gross income. In exchange, they want to keep Bush tax cuts – set to expire Dec. 2012 – permanent. These include:

• Keep income tax rates at 35% or lowered to 25 to 28%. 
• Keep capital gain and dividend income tax rates at 15% instead of 23.8% or higher after 2013. 

They also want to raise retirement age.

More on this story here and here.

Both Parties Looking Ahead 
Both parties are beyond the outcome from the Deficit Committee and laying groundwork for the next battle. Concerned GOP Sens. John McCain (Ariz.) and Lindsey Graham(S.C.) sent a letter to the Pentagon on Thursday night requesting a detailed report of the impacts the cuts might have on national security, and they are working on fallback legislation to repeal and perhaps replace the defense cuts. More on this story here.

Democrats are preparing for an end-of-year fight over extending emergency unemployment insurance benefits.The current one-year extension expires Dec. 31, and Democrats on the House Ways and Means Committee on Thursday introduced a bill that would extend benefits through the end of 2012. Fact sheet of the bill here. More on this story here.

Democrats Offer Significant Concessions, says CBPP

According to the Center on Budget and Policy Priorities, the new deficit-reduction plan from several Democrats on the Gang of 12 marks a dramatic departure from traditional Democratic positions — and actually stands well to the right of plans by the co-chairs of the bipartisan Bowles-Simpson commission and the Senate's "Gang of Six," and even further to the right of the plan by the bipartisan Rivlin-Domenici commission. See the side-by-side comparison in two tables below.

Table 1: COMPARISON OF DEFICIT-REDUCTION PROPOSALS Savings in Billions of Dollars, 2012-2021, Relative to Current-Policy Baseline
	Bowles-Simpson	Gang of Six	Democratic Offer1
Revenue Increases	2,238	2,064	1,300
Medicare and Medicaid2	402	500	475
Other Mandatory Programs3 (including chained-CPI proposal)	364	373	385
Discretionary4	1,295	1,165	1,300
Subtotal, Spending Cuts	2,061	2,038	2,160
Debt Service Savings	796	783	664
Deficit Reduction	5,095	4,885	4,124
1 Figures for the Democratic offer do not include economic stimulus proposals, the details of which are not available but apparently include both temporary tax-cut measures (like an extended payroll tax reduction) and temporary spending increases (like an extension of federal unemployment benefits). 2 The Gang of Six plan showed two alternative levels of health cuts, $500 billion and $383 billion. 3 The Bowles-Simpson plan includes the cost of repealing CLASS, whose implementation has now been suspended by the Administration. 4 The Democratic offer is adjusted to include $900 billion in discretionary savings enacted in the April continuing resolution and the Budget Control Act, for comparability with the other two plans. The Fiscal Commission and the Gang of Six plans measure discretionary savings relative to CBO's March baseline. Sources: Estimates for Bowles-Simpson plan are from Moment of Truth Project, Updated Estimates of the Fiscal Commission Proposal, June 29, 2011. Estimates for the Gang of Six plan are from material provided by staff. Estimates for the Democratic offer are based on press accounts. Estimates have been adjusted by CBPP staff to put them on a comparable basis.

Table 2: COMPARISON OF DEFICIT-REDUCTION PROPOSAL Savings in Billions of Dollars, 2012-2021, Relative to Fiscal Commission's Plausible Baseline
	Bowles-Simpson	Gang of Six	Democratic Offer 1
Revenue Increases	1,372	1,198	434
Medicare and Medicaid2	402	500	475
Other Mandatory Programs3 (including chained-CPI proposal)	364	373	385
Discretionary4	1,295	1,165	1,300
Subtotal, Spending Cuts	2,061	2,038	2,160
Debt Service Savings	621	608	489
Deficit Reduction	4,054	3,844	3,083
1 Figures for the Democratic offer do not include economic stimulus proposals, the details of which are not available but apparently include both temporary tax-cut measures (like an extended payroll tax reduction) and temporary spending increases (like an extension of federal unemployment benefits). 2 The Gang of Six plan showed two alternative levels of health cuts, $500 billion and $383 billion. 3 The Bowles-Simpson plan includes the cost of repealing CLASS, whose implementation has now been suspended by the Administration. 4 The Democratic offer is adjusted to include $900 billion in discretionary savings enacted in the April continuing resolution and the Budget Control Act, for comparability with the other two plans. The Fiscal Commission and the Gang of Six plans measure discretionary savings relative to CBO's March baseline. Sources: Estimates for Bowles-Simpson plan are from Moment of Truth Project, Updated Estimates of the Fiscal Commission Proposal, June 29, 2011. Estimates for the Gang of Six plan are from material provided by staff. Estimates for the Democratic offer are based on press accounts. Estimates have been adjusted by CBPP staff to put them on a comparable basis.

Repealing contract withholding tax would encourage tax evasion

Senator Reid plans to rewrite a House-passed measure repealing a rule that governments withhold 3 percent of payments to contractors starting in 2013. Read more here.

Center on Budget and Policy Priorities recently released a short report arguing that repealing the contractor withholding provision would encourage tax evasion among contractors the 2006 law signed by President Bush meant to eliminate. Repealing the law would reduce revenues by around $600 to $700 million a year because of increased tax abuse, based on estimates from the Joint Committee on Taxation ("JCT").

In response, the JCT recommended in 2005 that Congress impose a withholding requirement — one of the most common and effective methods of improving tax compliance — on government contractors. The 2006 law, scheduled to take effect in 2013, imposes a 3 percent withholding requirement on contractors in order to allow the federal government to collect taxes that contractors would already owe. The IRS has exempted contract payments worth less than $10,000.

GAO Has Uncovered Serious Tax Abuse by Government Contractors
GAO has found in multiple studies that thousands of federal contractors abuse the tax system each year. For example, in 2007 GAO summarized several of its previous reports, stating that 27,000 DOD contractors, 33,000 civilian agency contractors, and 3,800 GSA contractors owed about $3 billion, $3.3 billion, and $1.4 billion in unpaid taxes, respectively.[8] Earlier this year, GAO found that 3,700 contract and grant recipients of Recovery Act funds owed $750 million in unpaid taxes.

Tax abuse and non-payment of tax debts by federal contractors result in higher deficits, larger spending cuts, or an increased tax burden on taxpayers who meet their legal obligations. They also can hurt tax-compliant federal contractors, who may lose out on contracts because tax evaders and non-payers can undercut them on price as a result of illegal tax-evasion and abusive behavior. The GAO has identified instances in which contractors with tax debts won awards based on a price differential over tax-complaint contractors.

Repeal would encourage tax abuse, while sending a signal to honest taxpayers that they will have to pick up more than their fair share for the cost of government.

Flat tax system: Wealthy could pay less; corporations, low-wage earners more

Jay Fitzgerald of Boston Global writes on Oct 20, 2011:

Corporations and individuals supporting a simpler ``flat tax'' system…may find that it simply costs them more. Replacing the nation's complicated tax code with a single flat rate has again moved to the forefront of political debate as three Republican presidential candidates - Herman Cain, Rick Perry, and Newt Gingrich - have made such proposals the economic centerpieces of their campaigns.

This latest round of flat tax proposals would lower the highest tax-rate brackets and eliminate numerous deductions, write-offs, and other special provisions stuffed in the nation's cumbersome and convoluted tax code.

Economists and tax accountants say the flat tax system tend to mostly benefit the rich, who would see their taxes substantially lowered, while some poor and working-class people would be hit with tax increases as they get bumped into a higher, one-size-fits-all tax rate.

Take the recent Cain's 9-9-9 plan flat tax proposals. By slashing the top individual and corporate tax rates to 9 percent from 35 percent and imposing a new national sales tax, the wealthiest Americans - the top 1 percent of incomes - could average a $210,000 a year tax decrease, according to the nonprofit Citizens for Tax Justice in Washington. About 60 percent of taxpayers could end up paying an average of $2,000 more, the group estimates.

Nearly half of Americans currently pay no federal income taxes, due largely to various exemptions and credits, said Roberton Williams, a senior fellow at the Urban-Brookings Tax Policy Center in Washington. About half are poor. The other half includes Americans of all incomes taking advantage of deductions, credits, and loopholes, Williams said.

Some critics of the current tax code say it's not right that so many Americans pay no federal income taxes at all. Everyone should pay at least something, they argue.

Adding a national sales tax - there is none now - would ensure that everyone pays. ``Without question, more people will be paying taxes with a national sales tax in place,'' Williams said of Cain's 9-9-9 plan.

The tax proposals by Perry, the governor of Texas, and Gingrich, a former US House speaker, are hybrid plans that each contend would mean no tax hikes. Both plans would allow taxpayers to keep using the current system if they determine it would be cheaper than a flat tax.

But individuals and corporations alike could opt to file under a flat tax rate - 20 percent under Perry's plan.
Perry's plan would preserve deductions for mortgage interest, charitable giving, and state and sales taxes. The standard exemption would rise about $3,000 to $12,500.

Gingrich's plan calls for reducing the corporate rate to 12.5 percent, down from its current high of 35 percent. Like Perry, Gingrich would give individual taxpayers a choice: File under the current system or pay a flat tax of 15 percent, whichever is cheaper.

By giving taxpayers the option of sticking with the current system, Perry and Gingrich can argue their plan won't raise taxes on anyone.

But if some filers want to avoid the long form and file a simple flat tax, they could end up paying more.
Under Perry's flat tax, for instance, an individual earning $43,000 a year would see annual taxes increase by about $500, according to the Tax Policy Center. In contrast, someone earning more than $149,000 would see taxes fall by nearly $6,000 a year.

As for business, only larger corporations are supposed to pay federal income taxes at rates as high as 35 percent. But about two-thirds of these corporations pay no taxes after taking advantage of numerous tax exemptions, deductions, and write-down provisions, Williams said. A flat tax would mean some corporations won't be able to avoid taxes, assuming their deductions are eliminated, he said. Corporations…could lose a number of very attractive tax deductions, credits, and other provisions that currently drive down tax bills. The net result: higher corporate taxes.

Most economists and tax specialists agree the tax code needs to be simplified to make it more fair, and hopefully spur economic growth.

Gang of 12 will likely fail

Gang of 12 will fail. Authors of the Simpson-Bowles and Rivlin-Domenici budget reduction plans testified before the Gang of 12 this past Tuesday and offered a bleak outlook to the Gang of 12. Former White House Chief of Staff Erskine Bowles bluntly stated that he was concerned the panel would fail. Democrat and Republican members of the Gang of 12 focused their statements and questions on taxes and entitlements. Nothing new. Read more here and here.


America's credit rating doesn't hinge on Gang of 12. Moody indicated that the success or failure of the Gang of 12 will not be a “decisive” factor in determining whether America keeps its AAA credit rating. This news undermines Speaker Boehner's statement that America's credit rating is one of the key pressures forcing the super committee's hand toward a deal. “This outcome would increase the importance of the treatment of the expiring ‘Bush tax cuts’ at the end of 2012 in assessing the future path of deficits and debt, since other major policy measures would not likely be forthcoming,” Moody’s statement read. Read more here.

Online sales tax battle. Retailers are pressuring the super committee to include language based on the online sales tax bill Senate Majority Whip Dick Durbin introduced this summer. Retailers are reminding lawmakers they have allies, arguing that states could collect about $23 billion in new tax revenue in 2012, or more than a quarter of a trillion dollars in the next decade. Durbin is again putting forward a proposal to require online retailers to collect sales tax just like their storefront counterparts. Meanwhile, Sens. Ron Wyden (D-Ore.) and Kelly Ayotte (R-N.H.) are preparing to introduce a counter-proposal that seeks to protect small businesses from any new tax regime. The measure would affirm that no federal legislation should give states the authority to impose any new tax-collecting requirements on small Internet businesses and entrepreneurs, which they argue would be burdensome. Read more here.

Repatriation Holiday Battle Continues

The debate over a repatriation holiday heats up.  Both House and Senate members put forth bills last week to allow corporations to repatriate offshore funds, and Senator Carl Levin released a report Monday calling a corporate holiday enacted in 2004 a failure. Here's a summary.


Pro-repatriation


Last week, the House and Senate put forward two separate bills to allow corporations to repatriate offshore funds. The measures offer slightly different tax breaks (see here):

• A House bill would allow corporations to repatriate offshore funds at a 5.25 percent rate, the same rate as the 2004 holiday. Companies would also face penalties if they shed jobs while taking advantage of the holiday. House Blue Dogs (more centrist Dems) backs the bill. Read more here.
  Bill Sponsors: Reps. Kevin Brady (R-Texas) and Jim Matheson (D-Utah)
• A Senate bill would bring the tax rate down to 8.75 percent, with companies that hire workers getting the chance to pay as little as 5.25 percent. The Senate legislation also includes disincentives for businesses to eliminate jobs.
  Bill Sponsors: Sens. Kay Hagan (D-N.C.) and John McCain's

According to the Joint Committee on Taxation, the price tag for a tax holiday is about $78 billion over a decade, in part because companies would shift more profits offshore after a holiday and hold them there in anticipation of another round. But supporters of repatriation argue that the injection of funds would stimulate jobs and the ailing economy. 

Anti-repatriation

Some members of Congress disagree. Senator Carl Levin released a report last week showing that the "corporations that relied the most on the 2004 holiday shed jobs in the aftermath and didn’t quicken their pace of investment in research and development." His report is based on publicly available data and surveys of 20 companies that show they repurchased stock and raised executive compensation after a 2004 tax holiday rather than increasing research spending or adding jobs.

Findings in Senator Carl Levin's report: 

• Companies brought back $312 billion that qualified for the preferential rate, according to the IRS.
• Companies that repatriated the most money accelerated stock buybacks. Twelve of the top 15 repatriating companies increased stock repurchases from 2004 through 2007.
• The top 15 repatriating corporations reduced their overall workforce by more than 20,000 jobs after bringing back to the U.S. more than $150 billion in 2004 at the lower tax rate.  A “broad-based" studies of all 840 repatriating corporations found no evidence that the tax holiday increased U.S.-based payrolls.
• Oracle used repatriated money to buy Peoplesoft Inc. and reduce its workforce by thousands of employees, while counting the remaining Peoplesoft workers as a net increase in overall employment (7,500 jobs).
• DuPont returned $7.7 billion but the company’s U.S. job levels fell from 34,300 workers in 2004 to 32,800 in 2007. Meanwhile, DuPont repurchased $3.5 billion worth of its shares in 2005 alone, after buying back less than $1 billion in the three years leading up to the tax holiday. DuPont said Tuesday that it has since boosted payrolls above 2004 levels in the U.S., adding more than 1,000 workers in 2011 alone through expansions in Iowa, Ohio, North Carolina, South Carolina and Tennessee. DuPont, breaking from many of its corporate peers, is also not pushing for another tax holiday.
• IBM brought back $9.5 billion from overseas and proceeded to eliminate nearly 13,000 U.S. jobs in the years that followed. 
• Pfizer brought back $35.5 billion, more than any other company, then cut 11,748 jobs. Other companies, including Microsoft, PepsiCo and Procter & Gamble, created jobs after bringing home billions.
• Most of the $312 billion that was brought home by multinationals during the last holiday flowed from low tax or tax haven jurisdictions.
• HP ranked third on the list of companies, with repatriated funds totaling $14.5 billion and the number of jobs shed between 2004 and 2007 totaling nearly 9,000, according to the report. However, HP underwent an enormous restructuring during that period after its merger with Compaq.
• Intel brought home nearly $6.2 billion in foreign profits and slashed some 2,500 jobs between 2004 and 2007.
• Microsoft, which repatriated a total of $780 million, added 10,859 jobs between 2004 and 2007, according to the report.

A study last month by the Chamber of Commerce estimated that repatriated dollars could increase the gross domestic product by roughly $360 billion and create some 2.9 million new jobs.

But in an interview with "60 minutes" on Sunday, Obama jobs czar and General Electric CEO and Chairman Jeff Immelt, conceded the 2005 tax holiday failed to create a hiring spree among corporations that took advantage of the reduced tax rate.

“When it happened last time, it didn't,” Immelt said. “So there’s plenty of evidence that says that I'm not right about that. In other words, do I know how many jobs it's going to create? I don't. But it can't intellectually be any good to anybody to have $1.2 trillion outside the U.S.”

Gang of 12 Updates

Lacking Transparency
The Gang of 12 is being criticized for lack of transparency (here). Aside from the three public meetings the committee held in September, the calendar for the month of October is blank, with no hearing scheduled. While they are not meeting publicly, the members are meeting behind closed doors.

Deadlock May Prevent Deal
While the members of the Gang of 12 are secretive about their talks, some lawmakers, aides and lobbyists closely tracking the committee are increasingly skeptic and pessimistic that the panel will be able to meet its goal of at least $1.2 trillion in deficit savings over the next 10 years as they are running up against a familiar deadlock over taxes and cuts to major programs like the Medicare and Medicaid health care programs for the elderly, poor and disabled (here).

But the good news is that Democrats are more insistent on revenues now (here). "There's been no movement on revenues and I'm not sure the Democrats will agree to anything without revenues," a Democratic lobbyist who required anonymity to speak candidly (here).

Deadline is "Phony" 
According to Jonathan Bernstein of the Washington Post, the Thanksgiving deadline is a bit
"phony."  According to Bernstein, "nothing happens after the deadline that can’t be undone if and when Congress chooses to do so. Even if legislators actually let sequestration eventually begin, they can always go back and undo cuts, either selectively or entirely, or they can cut a deal then for everything going forward." Therefore, Bernstein writes that it’s "certainly possible that stories of deadlock are themselves trial balloons to test whether one or the other side would prefer a deadlock to making a deal."

Sounds like what Ellen Nissenbaum said last week on the Tides/Greenlining conference call.

Secrets Not So Secretive
John Judson of the Atlantic Wire, writes that the secrets of the Super Committee is not so secret. His article outlines what we've learned so far:

August: The committee was created as part of a deficit reduction deal between Republicans and Democrats to reduce the deficit by at least $1.2 trillion. Campaign finance details about what groups and organizations were bankrolling the Super Committee members began being circulated.

Sept 30: The committee beings meeting in secret As Washington's curiosity heightened, the legislators stayed silent though many suspected they were meeting, as Noel Brinkerhoff at All Gov reported. Early calls for transparency came from John Wonderlich at the Sunlight Foundation, a watchdog group, who said members were meeting in secret and subsequently "denying that they’re holding meetings, in order to avoid longstanding requirements that those meetings be public"

October 2: A grand bargain is ruled out Politico's Manu Raju and John Bresnahan get the scoop from sources from Republican Senator Jon Kyl. They say a deal in the ballpark of $3 trillion or $4 trillion can't be reached because Republicans don't want a significant tax hike and Democrats don't want significant reductions in Social Security and Medicare.

After four private meetings and two public hearings, Kyl is convinced that the three House Democrats on the supercommittee — Reps. Jim Clyburn of South Carolina, Xavier Becerra of California and Chris Van Hollen of Maryland — are not interested in a deal on taxes because of their demands for more revenue, sources say. Kyl has not ruled out taking up tax reform as part of any supercommittee proposal, although he knows time is running short on those deliberations.

October 5: A deal is likely!  Sources told Reuters that Republicans were "open to talking about revenue increases" and members of the committee hinted that a deal could be made.

Democrat, Senator John Kerry, hinted that an outline for the negotiations had been sketched out. "I don't want to discuss the framework. I don't think that's constructive," he said, adding, "We're obviously meeting a lot. We're going to become even more intense in those meetings now."

October 7: Committee members receive influx of cash It pays to be on the Super Committee. Susanna Kim at ABC News reports that the members "received over $83,000 from lobbying groups in the three weeks after being appointed to make $1.2 trillion in budget cuts."

October 10, a deal is unlikely! The Super Committee is gridlocked, reported Andrew Taylor at The Associated Press.

Democrats won't go for an agreement that doesn't include new tax revenue; Republicans are just as ardently antitax. The impasse over revenues means that Democrats won't agree to cuts to popular entitlement programs like Medicare ...

"There's been no movement on (new) revenues, and I'm not sure the Democrats will agree to anything without revenues," said a Democratic lobbyist who required anonymity to speak candidly.


October 10: Committee may slash Medicare Donna Smith at Reuters gets the scoop from a lobbyist who "has been following" the deliberations:

Medicare supplemental health plans, popular among politically powerful retirees, could come under the budget knife... The so-called "Medigap" insurance plans shield the elderly -- many living on fixed incomes -- from costly deductibles and other expenses not covered by the traditional fee-for-service Medicare healthcare program. "This one is clearly on the table," said a lobbyist...

Glaring Inequality

Dave Gilson and Carolyn Perot of Mother Jones recently published 11 charts that show inequality in America. Three of them are listed below.

The Top One Percent

Americans in the top 1 percent is an elusive bunch. Recently, more attention is given to this group. Below are some highlights of the top 1 percent: who they are, what they do, how much wealth they control, and how they earn their wealth?

• The top 1 percent of American households had a minimum income of $516,633 in 2010 (figure includes wages, government transfers and money from capital gains, dividends and other investment income). More here and here. 
• The richest 1 percent don't all work on Wall Street. Thirty-one percent (31%) of them are non-financial-sector executives, 15.7% are medical professionals, and 13.9% are financial professionals. More here.
• The vast majority of wealth held by the top 1 percent come from stocks, securities, business equity and other investments. The top 1 percent own nearly half of all stocks and mutual funds, and more than 60% of both financial securities and business equity. More here and here and here. 

• But while income of American wealthiest skyrocketed in the past three decades, most Americans' incomes stagnated. The bottom 60 percent earned a maximum of $59,154 in 2010, the bottom 40 percent earned a max of $33,870, while the bottom 20 percent earned just $16,961 at maximum. More here and here. 
•  While the top 1 percent own the majority of assets - stocks, securities, business equity and other investments - the poorest households were experiencing declines in net worth even before the recession hit. In 2007, the bottom 20 percent of households had an average net worth of –$13,800 in 2007, which fell further to –$27,200 in 2009. More here. 
• Average wealth of the bottom 80 percent was just $62,900 in 2009 — a dropoff of $40,900 from 2007, meaning the wealthiest 1 percent held an average of 225 times the wealth of the average median household in 2009 — a ratio that was 125 in 1962. More here.

See research below for more information:

• Edward Wolff, Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze—an Update to 2007 (examined the proportion of assets held by the top 1 percent in 2007, those whose minimum net worth was $8,232,000 or more).
• Bakija, Cole, and Heim, Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data.
• Center for American Progress, The Legitimate Gripes of the Other 99 Percent.
• Vanity Fair, Of the 1%, by the 1%, for the 1%
• Charts provided by Mother Jones

Obama harden stance on taxes

Obama appears to harden his stance on taxes, signaling that major tax reform is off the table. In a speech last Monday, September 19, Obama threatened to "veto any bill that changes benefits for those who rely on Medicare but does not raise serious revenues by asking the wealthiest Americans or biggest corporations to pay their fair share [and] will not support any plan that puts all the burden for closing our deficit on ordinary Americans."

And perhaps the firmest stance and most controversial is Obama's "Buffet Rule," which could put the GOP in a bind, say Democrats, since polling shows support for increasing taxes on wealthy individuals as part of the reduction plan.

The last major tax reform was in 1896 and the entire process took three years. It is unlikely that the Gang of 12 could undertake a major reform of the tax code.

Many millionaires do enjoy lower tax rates, says Center for American Progress

Center for American Progress Director of Fiscal Reform Seth Hanlon confirms that "large numbers of super-rich individuals are indeed paying lower taxes than middle-class families." Seth writes:

• "1,470 households reported income of more than $1 million in 2009 but paid zero federal income tax on it.
• The average federal income tax rate of the richest 400 people in the country in 2008 was 18.11 percent. In 2007 it was 16.62 percent. That is only a little more than just the payroll tax on wages—normally 15.3 percent on a worker’s first $106,800 in wages, counting both the share that workers pay directly and the share their employers pay, which comes out of their wages—let alone the federal income tax on those wages. The tax rates paid by the “Fortunate 400” have plummeted since the mid-1990s, when their average effective rates were about 30 percent.
• According to the Congressional Budget Office, the richest 0.01 percent (those with incomes of $8.6 million and above) paid a combined 17.5 percent in individual income and payroll taxes in 2005, the last year for which such data are available. The group of households with incomes ranging from $45,200–$92,400 paid only a little less on average, at 15.7 percent. The group of households with incomes ranging from $30,500–$45,200 paid 12.5 percent. Of course, there are wide variations within those income ranges, meaning that many middle-class families paid much more than the 17.5 percent average paid by the very rich, while many in the top 0.01 percent paid less than that.
• Due to the so-called carried interest loophole, managers of hedge funds and private equity funds pay 15 percent capital gains rates, and no payroll taxes, on their profits from managing other people’s money. That’s less than what middle-class families pay just in payroll taxes on their wages—let alone what they pay in income taxes. An important part of President Obama’s deficit reduction plan unveiled yesterday is closing the carried interest loophole."

Gang of 12 agrees on reforming the antiquated tax code

Members of both parties of the Gang of 12 appears agree that reforming the tax code needs to be part of the deficit-reduction plan and open to the idea of lowering the corporate tax rate.

The corporate rates should be lowered “significantly,” said Senate Finance Committee Chairman Max Baucus (D-Mont.). But he added, “This is not an easy undertaking, corporate tax reform. It takes time.”

Panel members also disagreed over closing loopholes and tax breaks for corporate-jet owners, Thoroughbred horses and ethanol producers.

Mr. Tom Barthold noted that the individual income tax is the largest source of federal revenue, representing 47 percent of the pie. And he said between 1950 and 2010, corporate and excise taxes have declined as a percentage of overall revenue as employment taxes have increased.

Win America increases lobbying efforts to repatriate offshore profits

Win America, a coalition lobbying Congress to allow corporations to bring back over $1 trillion in overseas profits, appears to be losing traction in Washington. President Obama Rose Garden speech did not address the issue altogether. Treasury Secretary Timothy Geithner told CNBC last week:

“We’re not going to do that, repatriation outside of corporate tax reform, because for the simple reason that it costs a lot of money. It costs between $20 [billion] and $80 billion to do that over 10 years, and if you’re going to do that, you have to be able to pay for it, and how are you going to raise taxes on the 96 percent of companies across the country that don’t benefit from repatriation?”

But endorsements from prominent Democrats, including former Democratic National Committee Chairman Howard Dean, gives repatriation advocates renewed hope that a tax holiday can be happen  this year. The SEIU's former president, Andy Stern, has endorsed the idea.

Win America’s public relations campaign is run by SKDKnickerbocker, the PR firm that managed President Barack Obama’s election and is home to Anita Dunn, Obama’s former communications director. It has hired ex-Rep. Jim McCrery (R-La.), the former ranking member on the Ways and Means Committee, "to lobby House Republicans and Mark Isakowitz, the former director of federal governmental relations at the National Federation of Independent Businesses, to work centrist Republicans."

"On the Democratic side, they’ve pulled in Jeff Forbes, former chief of staff to Sen. Max Baucus (D-Mont.), the chairman of the Senate Finance Committee and a member of the Joint Committee on Deficit Reduction.

"The campaign has also been working with Let Freedom Ring, a tea party group that helped drive the Republican Study Committee’s Cut, Cap and Balance mantra.

Rep. Kevin Brady, a Texas Republican on the Ways and Means Committee, introduced legislation in May that would call for an immediate tax holiday allowing companies to repatriate overseas profits at a 5.25 percent rate. And Sen. Kay Hagan (D-N.C.) is considering whether to introduce a similar bill.

The team of lobbyists see three potential ways to get the job done: Get the super committee to take it up; include it with a series of expiring tax provisions; or attach it to the president’s jobs bill."

A 2009 Congressional Research Service study found “no evidence of a corresponding increase in domestic investment or employment” from the 843 corporations that brought back a collective $312 billion in 2004.

RATE call for lowering tax rate and National Retail Federation lobbies for online retailers to collect taxes

On Tuesday, September 20, a coalition made up of 13 corporations sent a letter calling the White House and the Gang of 12 to work towards lowering the corporate tax rate. RATE (Reducing America’s Taxes Equitably) Coalition argues that reducing the tax rate will boost investment in the U.S., create more American jobs, and increase economic growth. It contends that U.S. corporate tax rate is the second highest among other OECD countries, which together have an average corporate tax rate of 25 percent.

Coalition members include Altria Client Services, Association of American Railroads, AT&T, Boeing, FedEx, Lockheed Martin, National Retail Federation, Nike, Raytheon, Time Warner Cable, UPS, Verizon and Walt Disney.

Dr. Elaine Kamarck, former advisor to President Clinton and Vice President Gore, and James P. Pinkerton, former advisor to Presidents Reagan and George H.W. Bush, will serve as RATE co-chairs.

The Coalition appears to be flexible about the details of how to lower rate and did not take a stance on whether the U.S. should switch to a tax system that only taxes American multinationals on profits made in the U.S. Currently, the U.S. taxes American corporations on profits made globally.

The Coalition underscore a rift within the corporate community over a corporate tax holiday that would allow multinationals to temporarily bring offshore profits to the U.S. at a lower rate than 35 percent. Among the supporters of a tax holiday include GE, Apple, Google, and the U.S Chamber of Commerce.

But AT&T has been among the corporate giants that have said they believe a holiday push could distract from the broader goal of reform. “This is not the tax shelter coalition. This is not the tax break coalition,” Pinkerton said.

The makeup of RATE Coalition membership also appears to highlight the divide within the corporate community on tax reforms as members are mostly companies that have a big domestic focus. Those companies tend to pay higher effective tax rates than many of their multinational counterparts, due in part to the ability of multinational to shift profits offshore. “There’s potential for high-stakes conflict between domestic and multinational firms, if some of those breaks for foreign operations are targeted to offset the cost of lowering the corporate rate.”

Also, the National Retail Federation is lobbying to push legislation that would require online retailers like Amazon.com and Overstock.com to collect sales tax like their store-front counterparts. Senator Dick Durbin (D-Illinois), author of the sale tax sale tax legislation introduced in July, said that requiring online retailers to collect sales tax will generate as much as $250 million for state governments.

Go Big or Go Back: Challenge Rises as the Gang of 12 Looks To Old Deficit Reduction Proposals

If finding $1.5 trillion in deficit reduction was a tough task, the job for the Gang of 12 just got much tougher. President Obama’s request last week for the panel to find offsets for his $450 billion job initiative – setting a new bar at nearly $2 trillion in net savings – dwarfs in comparison to the $4 trillion the co-chairs of Obama’s 2010 Bowles-Simpson deficit commission is asking the Gang of 12 in a letter to come up with.

The letter called for the Gang of 12 to “Go Big” was signed on by 60 other business experts. The 2010 Bowles-Simpson deficit committee’s proposed plan to reduce the federal budget by $4 trillion in 10 years failed to obtain the supermajority votes needed to pass it.

Finding $4 trillion in deficit reduction is also supported by a bipartisan group of more than 30 Senators. The group, led by Sens. Mark Warner (D-Va.) and Saxby Chambliss (R-Ga.), also wants the Gang of 12 to draw from other plans that have been put forward, including from the Gang of Six, of which Warner and Chambliss were members.

While it may be too early to judge, it does appear that the Gang of 12 may not be willing to push the envelop with fresh ideas. “It wouldn’t make sense to try to reinvent the wheel,” California Rep. Xavier Becerra, a supercommittee member and the Democratic Caucus vice chairman, told POLITICO.

“We can take a lot of the good work that was done by any of these commissions and groups to give us a set of ideas which we can work off of,” he said. “If we do that, I think that can help us accelerate our time frame.”

According to Scott Wong of POLITICO, this means that there is a "familiar road map for the deficit panel: tax code reform, including closing loopholes for special interests and overhauling the big entitlement programs of Medicare, Medicaid and Social Security. Other cuts to domestic programs are also under discussion, though the Defense Department is fighting deep cuts to military programs.”

  

The Big Three: Medicare, Medicaid and Social Security

• Democrats on the House Ways and Means Committee last week recommended raising the eligibility age for Medicare to 67 from 65, an idea that has the backing of Obama and most Republicans. 
• The Gang of 12 could  borrow an idea from Obama’s Simpson-Bowles deficit committee: “Force drug companies to provide rebates to Medicare recipients, nearly a $50 billion savings.” 
• Obama also recommended hiking premiums for wealthier recipients. 
• President Obama’s recommendation for Gang of 12, however, will not include any changes to Social Security, which allows him to avoid a clash with his Democratic base over the popular retirement program at a time when he needs its support to push for his $447 billion jobs program and to buck up his lagging poll numbers. 

Tax reform

• According to a report by Scott Wong of POLITICO, Sen. Rob Portman (R-Ohio), a Gang of 12 member who served as President George W. Bush’s budget director, is "open to Democrats’ efforts to close tax loopholes — so long as the new revenue is used to lower overall tax rates. That’s an approach adopted by the Gang of Six and the Simpson-Bowles deficit commission."
• Baucus and Ways and Means Committee Chairman Dave Camp (R-Mich.) remains another launching pad for tax reform, according to Scott Wong. Earlier this year, "the two lawmakers launched a joint committee to identify ways to create jobs by simplifying the Tax Code, lowering rates and broadening the tax base."

How much sway do the Gang of Six and Simpson-Bowles have? 

That is yet to be seen. 

Former Congressional Budget Office Director Alice Rivlin, who served with Baucus, Becerra, Hensarling and Camp on the fiscal commission, isn’t discouraged by the fact that none of her former colleagues now on the Gang of 12 backed sending the Simpson-Bowles plan to Congress.

“It’s a new ballgame, and my hope is that they will [realize] this is a big opportunity to do a bipartisan deal because they have extraordinary powers,” Rivlin told POLITICO. “They could get it through the Congress with relative ease.”

The Gang of Six, however may have less influence. Despite having 30 Senate supporters, Congressional leaders have been "traditionally wary of freelancers who work outside the standing committee system [and] 'tend to like things to go in regular order,'" a Senate Democratic aide said in an article by Humberto Sanchez in Roll Call. 

Corporate Power Decried By Former Lawmaker

Former Rep. Paul Kanjorski (D-Pa.) spoke candidly about the relationship between large corporations and government, admitting, "Because [corporations] have become so international and global in nature, it's highly questionable whether governments can actually control corporations to a sufficient degree to prevent them from controlling governments."

One of the most worrying examples of the increasing ungovernability of corporations is the current push to allow corporations that have been stashing capital overseas to bring it back to the U.S. at a rate as low as 5 percent, argued Kanjorksi, who served for 26 years in the House of Representatives before being ousted last year. A coalition of tech firms, drug companies, energy conglomerates and lobbying front-groups are pushing Congress to pass a tax holiday bill.

"The reality is, why should we be bargaining with super-national corporations who are actually acting against our interest in avoidance of what our law is? We are impotent to get them to respond."

Kanjorski was speaking from experience. The district he represented has long been neglected by corporate America. Home to the small cities of Scranton and Wilkes-Barre, the 11th District of Pennsylvania was a significant manufacturing hub for much of the 20th century, but firms shipped most of those jobs elsewhere decades ago, leaving the region struggling economically well before the financial crash of 2008 devastated the national labor market.

Read Rep. Kanjorski's interview with the Huffington Post, 8/26/2011.

Gov. Brown to tighten corporate to raise $1B

Gov. Jerry Brown unveiled a plan Sept. 6, 2011 to "tighten a corporate tax formula in exchange for giving manufacturers a sales tax exemption and offering enhanced job tax credits." The proposal, part of his job-creation package, requires multistate companies "calculate their tax liability only on the proportion of sales they have in California relative to elsewhere in the nation, a method called single sales factor." The proposal would eliminate a bill passed in 2009 that allows companies choose a more generous of two tax formulas. CA is one of only two states to allow companies a choice on an annual basis. Eliminating the rule could raise $1 billion.  The success of the bill requires 2 GOP votes, which seems unlikely. Brown proposes the new savings would give credits for new hires and grant manufactures a sales tax break.

How does single sales factor work? See article
Take PA as example. Corporations pay a 9.99% tax on profits in PA, but only based on the percentage of their business in Pennsylvania (since they will be subject to the same tax in other states). The percentage of their business in PA is calculated based on sales, property, and payroll in the state. The current ratio is 70% sales, 15% property, 15% payroll. Here is how the formula works:

Percent of sales in PA x .70 + Percent of property in PA x .15 + Percent of payroll in PA x .15 = Percent of business in PA.

Moving to a single sales factor would mean corporations use only their percentage of sales to calculate tax liability.

Winners and losers:
-Businesses with a higher percentage of their operations, but a lower percentage of sales in PA would see a tax cut.
-Business with a higher percentage of sales in PA, but more of their operations in other states would see an increase.

There are a couple very good reasons to move to a single-sales factor
-It simplifies tax compliance
-It would stop punishing businesses that keep or move their base of operations to Pennsylvania.