AMERICAN HOUSING RESCUE AND FORECLOSURE PREVENTION ACT OF 2008--CONTINUED -- (Senate - July 10, 2008)
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CHANGES IN THE TAX SYSTEM
Mr. GRASSLEY. Madam President, as the upcoming Presidential election approaches, we are learning more about changes each of the major candidates would make in our tax system.
Most of the attention in this regard is going to issues such as income tax rates, corporate tax rates, and the alternative minimum tax. These are very important parts of our Tax Code and do deserve the attention they are getting--particularly in a Presidential race--because then you have an opportunity not only to state your views but to educate the public about the complications of the Tax Code. This is what the public needs to know more about.
Now, my purpose for coming to the floor, too, is to discuss some of the lesser known parts of the Tax Code that are becoming part of the Presidential debate on taxes. Changes made in these areas can still make big differences in what citizens pay to the Government every year.
I am here to discuss what is termed the ``Pease limit,'' the overall limitation on itemized deductions. That name comes from a Member of Congress probably 20 years ago who thought up the term. Then the word ``PEP'' is a phaseout of personal exemptions. So we are talking about a part of the Tax Code that does things in a stealth way to make people pay higher marginal tax rates, even though the law would say that the marginal tax rate is only 35 percent--or in the case of Senator Obama's proposal, 39.6 percent. But yet when you put limitations in there and a phaseout of the personal exemption, you have a higher marginal tax rate, but it doesn't look very--it is not transparent.
So PEP and Pease were originally enacted by a Democratic Congress as a way of evading the first President Bush's refusal to raise the top statutory tax rate. By phasing out the personal exemption and itemized deductions for upper income taxpayers, the Democratic Congress was able to enact a kind of backdoor tax increase. However, in 2001, when I became chairman of the Senate Finance Committee, Congress reduced PEP and Pease in order to reduce taxpayer confusion and minimize inequalities based on a taxpayer's understanding of the law. But from my point of view, I figured if you are going to have a higher marginal tax rate, you should not camouflage them. You ought to simply say, instead of a 33 percent marginal tax rate, we are going to have 36 or 37 percent. Maybe for people who have income from subchapter S, it is even higher than that. Why not be honest with the taxpayers and say what the marginal tax rate is, instead of hiding it in this camouflaged way called PEP and Pease?
That bipartisan simplification was done at the recommendation of the nonpartisan Committee on Taxation to get around a principle that was put in place--or that recommendation was carried out by the nonpartisan Joint Tax Committee because we ought to be very transparent in our tax laws.
Despite this, those who see more Government spending as the solution to all the problems are desperate to seize more money from the American taxpayers.
We are hearing rumors of let's go back to camouflage. The junior Senator from Illinois would need more money to fund all the promises he is making. Restoring the phaseouts for itemized deductions and personal exemptions seems a likely source of some of that money. In discussing the tax proposals of the likely Democratic nominee, I am referring to a publication titled ``A Preliminary Analysis of the 2008 Presidential Candidates' Tax Plans.'' This was prepared by an organization called the Tax Policy Center. The Tax Policy Center is a joint venture of the Urban Institute and the Brookings Institution, both well-respected think tanks.
According to this publication, my distinguished colleague from Illinois would restore PEP and Pease. In other words, he would bring less transparency to what is a higher marginal tax rate. That is, he would restore the phaseouts and the complexity they would mean for millions of tax-paying families. However, it is also noted that he would set an increased income threshold of $250,000 for married couples filing jointly. This is consistent with the candidate's stated goal of targeting tax breaks to low- and middle-income taxpayers while shifting more of the tax burden on the higher income taxpayers.
If your family makes less than $250,000 a year, you might think this sounds like a good deal. For singles, the threshold for phaseout of personal exemptions would probably be lower, but the phaseout of itemized deductions would not vary with the filing status if current law is followed.
As an aside, the proposal of the distinguished junior Senator from Illinois would create a new marriage penalty. For those considered by the Senator from Illinois to be low- and middle-income taxpayers, the idea of raising taxes on other people might sound like a good idea but hold on.
On March 14 of this year, this body approved a budget with 51 votes. One of those 51 ``yea'' votes was cast by the Presidential candidate from Illinois. That same Senator voted again for the budget on June 4, when the Senate voted on that conference report. I am not sure if he is not communicating with the rest of the Democratic caucus or was too busy campaigning to become completely familiar with the budget. But he is making promises that the budget he voted for will not allow.
The budget passed by Congress earlier this year would protect taxpayers in the 10-percent and 15-percent brackets but would subject filers in the 25-percent bracket and brackets above to these camouflage provisions I have been talking about that we call PEP and Pease. To get an idea of what this means, I wish to walk through the 25-percent bracket, the 28-percent bracket, and the 33-percent bracket.
These particular brackets are important because they contain families with less than $250,000 in income and singles with less than $125,000 in annual income. It has been implied that the junior Senator from Illinois would protect these filers from tax increases as President. But restoring PEP and Pease provisions within the confines of this year's budget would subject filers in these brackets to this backdoor camouflage, the less transparent tax increase. The Senator from Illinois may say he is going to protect families earning less than $250,000 a year, but the budget he voted for will not do that.
According to the Internal Revenue Service, single individuals falling within the 25-percent bracket in 2008 start at taxable income of more than $32,550. That is not a high-income person. They earn taxable income of no more than $78,850--in a lot of places in this country, that is not a very high income. It is high for my State of Iowa, but it is not high for a lot of States. Singles in the 28-percent bracket will earn taxable income of more than $78,850 but less than $164,550. The important number is $125,000. If that many filers in the 25-percent and 28-percent brackets make less than that, based on the Democratic budget, these taxpayers would be hit with a PEP and Pease camouflage, less transparent rates of taxation.
Looking at the brackets for married filing jointly for the 2008 tax year, according to the IRS, married filers in the 25-percent bracket will start at a taxable income of more than $65,100. Taxpayers in this bracket will earn taxable income of no more than $131,450 annually. In the 28-percent bracket, they will earn taxable income of no more than $200,300. For the 33-percent bracket, married filers filing jointly will earn no more than $357,700 but more than $200,300. For married individuals filing jointly, the important number is $250,000.
Filers in the tax brackets I have walked through may expect the Senator from Illinois to protect them from tax increases if he is elected President. But the budget he voted for earlier this year makes that impossible.
As I said, the reinstatement of PEP and Pease amounts to a backdoor tax increase. I say backdoor because it increases the effective rate for many filers without really increasing the statutory tax rate. That is why it is camouflaged. That is why it is less transparent. And if you want to increase taxes, you ought to have guts enough to say what is the real marginal tax rate and put it in the tax laws, just like the 25, the 28, the 33, and the 35 are now.
For a family of four, this backdoor tax increase would be significant. If your family falls in the 25-percent tax bracket, according to the Finance Committee Republican staff analysis from March 2001, PEP and Pease could make your actual rate 26 percent. We can see the difference between the green line and the red line is when you are hit with PEPs and Peases. Your tax increase is going to be at a higher rate than what your tax form really says it will be. Again, why camouflage it?
The news is even worse--and I will have charts on this point--for filers in the 28-percent bracket and the 33-percent bracket. In the 28-percent bracket, a family of four could pay a real tax rate of 32 percent. So if you want people of that tax bracket to actually pay 32 percent, why don't you have a tax bracket that says it instead of camouflaging it? A family in the 33-percent bracket, as we can see in the next chart, a family of four could pay a rate of 37 percent. Again, the difference between the 33 is what you are told in your tax rate chart you are going to pay, but as a practical matter, you are paying 4 percentage points higher.
I end by stating that I believe taxes are a necessary part of life. We all benefit from the services our Government provides, and that Government needs money to function. We collect that money from taxes. However, I think our tax system should be transparent and honest, not camouflaged. Raising money by limiting personal exemptions and itemized deductions is not transparent. As I have said, it amounts to a backdoor tax increase. If anyone thinks people should hand over a greater percentage of their income to the Government, that person should openly advocate increasing statutory rates.
I am also concerned that many people around the country may be relying on the latest campaign position of the junior Senator from Illinois. That latest campaign position says he intends to protect low- and middle-income tax filers from tax increases. Right now, he is at odds with his own party and with a budget for which he voted. I bet that being subjected to a backdoor tax increase is not the sort of change most Americans believe in, to say nothing of restoring what the nonpartisan Joint Committee on Taxation stated was a very serious source of complexity for the American taxpayers, a complexity we took out in the 2001 tax bill.
A series of correspondence has gone back and forth between the Republican and Democratic leadership regarding the extension of expiring tax provisions and energy tax incentives. On July 3, Leader McConnell sent a letter to the majority leader urging that he work with us to find areas of bipartisan agreement in order to break the current impasse over extending time-sensitive provisions that we call extenders, both for energy and the other category of extenders, such as R&D tax credits, an example of about 40 that have to be extended.
On that day, the majority leader responded in a fairly sharp manner:
While I am pleased the Republicans appear to have abandoned their fiscally irresponsible ways when it comes to the extenders bill, it is hard to comprehend why Senators McConnell and Grassley would choose to cut programs to help working families, seniors and veterans in need of health care in Kentucky and Iowa in an effort to protect multinational corporations and hedge fund managers.
On a preliminary point, in all the back and forth on this issue, I have not criticized the majority leader by name. In the tensions that come in Senate debate and the political environment, I think it is best to stick to that course. So I am disappointed that the majority leader did not keep the discussion on that level.
With all due respect to him, he seems to have misread the letter, so I will set the record straight on a couple of important points.
First, a simple extension of expiring tax relief, including extension of the AMT patch, should not be offset with accompanying tax increases. This does not mean we are opposed to offsetting the revenue loss from new tax relief policy with spending reductions or revenue raised from tax proposals that are grounded in good tax policy.
Then my second point. The distinguished majority leader accused Leader McConnell and me of protecting hedge fund managers. This is simply not the case, which I will demonstrate. In fact, the House extenders bill contains an offshore deferred compensation proposal.
This proposal that the Democrats actually support allows these same hedge fund managers a very generous tax break that is not available to the average taxpayer. The House-passed hedge fund proposal allows these hedge fund managers to avoid paying taxes on their offshore deferred compensation if they make a cash donation to a charity equal to 100 percent of the amount of the offshore deferred compensation. Meanwhile, the average taxpayer is limited in how much they can deduct even for contributions to charity. They can only deduct charitable contributions if those contributions do not exceed 50 percent of their adjusted gross income. So if a teacher donated his or her entire salary to charity, he or she would only be able to claim about half of that as a deduction. But a hedge fund manager who sheltered income in the Grand Caymans would be allowed to claim a deduction for the entire amount of his or her sheltered income.
I want to make it clear, not only do I support the policy of changing the tax treatment of offshore deferred compensation for hedge fund managers, but I would make sure that we corrected the giant loophole that came over here from the House of Representatives benefiting hedge fund managers. We should make sure that if we are going to tax the deferred income, we do not leave an escape hatch in the future.
With respect to the spending cut allegation, the majority leader's comments again, with all due respect, implied that he has not read the Republican leader's letter correctly. The Republican leader's offer to break the stalemate does not pit spending cuts for benefits for working families, for seniors, for veterans against expired tax relief provisions. The spending described in the letter is for unspecified and unwritten appropriations bills as far as 10 years in the future. The general spending account identified represents the excess of new future spending levels over the current levels for nondefense discretionary spending plus inflation. None of the current-law levels of these categories of spending would be cut. What is more, the Republican leader's offer would leave intact nearly all of the $350 billion in new extra spending. On its face, it is an extremely modest revision of this extra spending.
I ask unanimous consent to have printed in the Record a copy of the letter from the Republican leader and the majority leader's response.
There being no objection, the material was ordered to be printed in the Record, as follows:
McConnell Proposes Compromise To Extend Tax Relief, Energy Incentives
WASHINGTON, DC.--U.S. Senate Republican Leader Mitch McConnell sent the following letter to Speaker Nancy Pelosi and Majority Leader Harry Reid on Thursday calling on Democrats to forge a compromise with Republicans to extend expiring tax relief in a deficit-neutral manner, without permanently raising taxes.
July 3, 2008.
DEAR MADAM SPEAKER AND MR. LEADER: This letter is in response to a letter from the House Democratic Leadership, dated June 12, 2008 and a letter from the Senate Leadership, dated June 13, 2008. Both letters deal with the legislation, H.R. 6049, which is designed to extend certain expiring tax relief provisions and energy tax incentives.
We object to some of the assertions in both letters about the position, record, and intentions of the Senate Republican Conference regarding tax increase proposals and the tax relief extensions. However, rather than respond to overtly coordinated election-year letters in a partisan fashion, we would like to focus on areas of bipartisan agreement in order to break the impasse on these time-sensitive tax matters.
The Senate Republican Conference places the highest priority on fiscal responsibility. We believe that deficit reduction should be considered with respect to all tax and spending proposals. However, the first step toward mitigating current adverse fiscal patterns is to do no more harm to the fiscal situation.
New spending increases the deficit, whether it be the expansion of discretionary spending or the expansions of entitlement spending. New tax relief is scored as increasing the deficit, even in instances where the resulting economic growth raises far more revenue than is estimated to be ``lost.'' Under Congressional budget accounting, however, the extension of expiring tax relief looks like it increases the deficit, while the extension of expiring entitlement spending does not. This does not make sense.
Legislation to extend expiring tax relief, including an extension of the alternative minimum tax (AMT) patch, and legislation to extend expiring energy tax incentives all enjoy overwhelming bipartisan support. Few would dispute the merits of continuing these tax relief provisions. Indeed, with these bipartisan tax relief provisions in place, aggregate Federal tax collections have yielded revenue above the post World War II average of 18.2 percent of gross domestic product. Since these tax policies have yielded revenue above the historic average, we see no reason to condition their extension on new tax increases.
The conference report on the 2009 budget resolution increases non-defense discretionary spending by $25 billion above the President's request in 2009. When these amounts are enacted, they will be perpetuated in the baseline and will result in $350 billion in higher deficits over the next ten years. The deficit effect of this new spending cannot be ignored. It is surely as much of a fiscal burden as $350 billion in tax policy extensions.
As a compromise, we suggest the following. The Senate Republican Conference will agree to offset the revenue lost from new tax relief policy with spending reductions or revenue raised from appropriate tax policy proposals. In exchange, the House and Senate Democratic Leadership would revise the desired new non-defense discretionary spending in the 2009 Congressional budget downward to a level sufficient to offset the cost (relative to the Congressional Budget Office baseline) of extending expiring tax relief. If agreed to, extension of expiring tax relief, including extension of the AMT patch and expiring energy tax incentives, could be accomplished in a way that achieves your stated goal of being deficit neutral, but without the unstated and unwarranted result of increasing the size of the federal government.
The Senate Republican Conference is committed to, as the letter from the House Democratic Leadership states, ``enacting legislation extending tax relief to businesses and families in a fiscally responsible manner.'' We look forward to working with our friends in the House and Senate Democratic Leadership on this time-sensitive legislation.
U.S. Senate Republican Leader.
Washington, DC, July 8, 2008.
The Hon. MITCH MCCONNELL,
Minority Leader, U.S. Senate,
DEAR LEADER MCCONNELL: Thanks for your recent response to the letter I sent you June 13 regarding extension of the expiring tax provisions and energy tax incentives.
Let me begin by saying I strongly share your hope that the Senate can work out a bipartisan solution to extend these important tax incentives before the August recess. Such action is as important as it is long overdue.
Although you have voted twice against just such a package, I did note that your July 3rd response contains one potentially positive thought that may make such a solution more likely. As you know, under this Republican President and a Republican-controlled Congress, the nation's debt and deficits reached historic levels. Record budget surpluses were transformed into record deficits and the nation's debt grew by more than $3 trillion. Much of this was caused by the fiscally irresponsible decision to cut taxes and increase spending without corresponding offsets. Your July 3rd letter appears to indicate you are now ready to set aside your fiscally irresponsible ways when it comes to extenders and adhere to pay-as-you-go budget rules Democrats enacted at the beginning of the 110th Congress.
Unfortunately, rather than accept the noncontroversial offsets contained in the bipartisan legislation passed by the House and the substitute put together by Senator Baucus, your letter indicates Senate Republicans believe we should instead jeopardize important investments in our nation's health, energy, and infrastructure sectors. Both the House-passed and Baucus substitute bills rely on the same two offsets--one ends the use by hedge fund managers of offshore accounts to avoid paying taxes and the other merely extends an existing delay in the implementation of interest allocation rules for multinational corporations. Neither provision has generated opposition from the affected industries and both are far preferable to cuts in health care, energy, and infrastructure programs that would harm Kentucky and many other states.
Despite your apparent decision to protect hedge fund operators over critical national priorities, I remain committed to taking up and passing bipartisan legislation to extend important tax incentives before the August recess. The fate of this legislation rests in your hands. I hope you and those in your caucus who have blocked the Senate from passing this legislation twice earlier this year will reconsider your opposition and join Democrats to extend this much-needed tax relief.
Mr. GRASSLEY. Madam President, to put the matter in some perspective, I ask unanimous consent to have printed in the Record an article containing a summary of an analysis by noted economist Kevin Hassett, a senior fellow and director of economic policy at the American Enterprise Institute.
There being no objection, the material was ordered to be printed in the Record, as follows:
[From American Enterprise Institute for Public Policy Research, Feb. 11, 2008]
How George Bush, Big Spender, Destroyed Nirvana
(By Kevin A. Hassett)
If you could go back in time to President George W. Bush's inaugural address and add one economic statement, what would it be? For me, there is an obvious answer.
If Bush had promised in January 2001 that the baseline of government spending that he inherited when he took office would be the cap during his term, then we would have a big budget surplus today. It would have been easy to do. He just had to say: ``I will not spend one penny more than President Bill Clinton planned to. I will veto any bill that tries to.''
I have written before in this space that Bush has outspent Clinton by a mile. With government spending still out of control, the gap between where we are and where a disciplined nation could have been is getting bigger and bigger.
With a recession looming, the policy implications of the spending explosion are serious. If a deep recession occurs, we will have less wiggle room.
To see how different the world could have been, I gathered data from a number of sources and ran an alternative history. In that wishful place, government spending was set equal to the spending envisioned by the Congressional Budget Office in the January 2001 long-run forecast, plus the spending for the war in Iraq and to fight terrorism. This simulation assumes that the war would have happened in spite of Bush's spending promise, and wouldn't have induced him to seek cuts elsewhere.
The difference between that spending path and the one we are on is huge. Today, we expect federal spending in 2008 will be $2.9 trillion. According to the alternative history, spending would be $2.5 trillion.
With spending at the lower level, we would have a surplus of $152 billion if revenue were equal to what it is currently projected to be.
Running the simulation forward, the gap between revenue gets wider and wider. By 2017, we are scheduled to spend almost $1 trillion more than we would have if we had stuck to the Clinton baseline. With the low spending baseline we would have a surplus in 2017 of $1.1 trillion, instead of the $151 billion surplus that's currently forecast.
Think of it this way. If we now had the lower spending levels that Bush inherited, we could extend his tax cuts, repeal the alternative minimum tax, enact the current stimulus package, and still have a 10-year budget surplus of $1.9 trillion. And, remember, that allows spending to be adjusted up for the Iraq war and the war against terrorists.
Many observers might say this scenario is unrealistic. The 2001 long-run forecast covered both discretionary and mandatory spending. No administration, the argument might go, could have held the line on the growth of Medicare and Social Security spending.
HOLD THE LINE
There are two responses to that.
First, a president could always demand that spending be capped and that discretionary spending be reduced to offset unexpected increases in mandatory outlays. Social Security might be the third rail of American politics, but it might not be.
It has been changed before. Why couldn't it be changed again? Families do that all the time. If Johnny needs braces, then you take fewer trips to the restaurant.
The second response is perhaps more powerful. Let's see what happens when we allow mandatory spending to go up as it did. This lets Bush have his prescription-drug benefit, which is now part of mandatory spending.
If we had held the line on everything else that is discretionary, we could have had the prescription-drug plan, the Iraq war and the war against terrorists. We could have kept all the Bush tax cuts, made them permanent, repealed the AMT and added the stimulus package and still ended up with a balanced budget from 2008 to 2017.
It makes you sick to think about it. All that money wasted on ethanol and bridges to nowhere has accumulated into a pile that massive. Uncle Sam ate a whopping helping of apple pie every day for seven years, and now he is obese.
This is important to bear in mind as we move forward to the general election. We don't have a deficit because of Iraq, or the tax cuts, or the drug benefit. We have a deficit because the government grew fat. We can't fix that with tax increases. Uncle Sam must go on a diet.
A simple way to start would be this: Whoever is elected president this November should pledge that he or she won't spend $1 more than we currently plan to. If Bush had done that seven years ago, we would be in a different world.
Mr. GRASSLEY. According to the analysis, if the last Clinton administration budget were the baseline, Federal spending would be $400 billion less than it is this fiscal year. Dr. Hassett's analysis accounts for spending increases for the global war on terror and related matters that were anticipated at the end of the Clinton administration. The analysis shows that other Government spending is trending $400 billion above where it otherwise would be.
In essence, the Republican leader's offered offset categories are future undefined spending budget room that did not materialize until the conference report on the budget was adopted a few weeks ago. Keep in mind that this new undefined future spending sits on top of a baseline that is, as Dr. Hassett's analysis shows, $400 billion higher than the trendline from the Clinton administration.
If the majority leader does not engage us on this deficit-neutral offer, then he is putting taxpayers in his State at risk for the loss of several deductions they used on tax returns for last year. Included are the sales tax deduction, college tuition deduction, and teachers' classroom expense deduction.
The latest IRS statistics of income data on the number of families and individuals claiming these benefits for the States of Nevada, Kentucky, and Iowa will appear in the Record after my discussion.
The tradeoff is clear. Deal with these tax benefits which affect taxpayers now. Offset them with undefined extra spending accounts for appropriations bills that will not be written until several years down the road under the present budget. All that can be accomplished without adding a penny to the Federal deficit.
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