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.