How does a bill that offers a short-term extension of unemployment benefits, paid for raising taxes on hedge funds for ten years, end up adding $80 billion to the deficit?
The answer is that HB 4213 is full of giveaways. I know that they are calling it the Closing Tax Loopholes Act, but perhaps they should extend that title to include, "Thinking Up a Few New Ones, Too."
Consider these elements of a bill that is supposed to help the poor make it through the recession, while simultaneously "eliminating loopholes."
- Tax Breaks for NASCAR: Owners of race tracks (Bruton Smith and the other owners of NASCAR) can accelerate the depreciation schedule on their investments in race tracks to just seven years!
- Help for corporate farmers (i.e., Cargill): Relief for cottonseed and fish farm producers of not more than $42 million and $25 million, respectively.
- Happy Sheep: Special grants, from money held by the Treasury Department that was previously set aside from tarriffs, to wool manufacturers.
- Help for the oil industry: Small oil and energy firms will be able to take a special deduction of 15 percent of their gross income, even if that 15 percent is larger than their net income.
- Deductions of state sales taxes. Useful for itemizers. See mortgage interest deduction.
- Provisions that penalize small businesses: If passed, employees in some service-oriented S-Corporations with fewer than 3 workers will have to pay self-employment tax.
Perhaps the least palatable handout to the rich is the "active financing exception." This language, inserted by Sen. Baucus and Sen. Hatch, extends for one more year a tax break that was temporarily established in 2007 and which only applies to American
financial institutions with foreign subsidiaries. It allows them to credit income to those subs as passive income. It sounds like taxese, and I suppose it is, but the upshot is that it reduces income tax liabilities of American banks, brokerage firms, and other traders. Even worse, it encourages these companies to move their finances overseas. Supporters of the bill say that it will American financial institutions to get bigger, compared to their competitors in other countries. Certainly, it will be a boon for Bermuda, Switzerland, and the British Virgin Islands.
So, that is what we have in the new "stimulus" bill.
HR 4213, optimistically entitled "American Jobs and Closing Tax Loopholes Act." The Congressional Budget Office estimates that while it would raise $47.8 billion in new revenue over the next ten years, it would add $126 billion in new spending. Over half of the new spending would occur before 2012, while revenue gains are muted until at least 2015.
The bill has stimulated a lot of discussion about how it increases taxation on carried interest. Supporters of "tax justice" are particularly interested in it. Oddly, Magic Johnson and his private equity friends have been able to organize minority and female business owners against these taxes.
That is why the numbers made me suspicious in the first place. Ten years of higher taxes, much higher, on some of the wealthiest people in world, set against a few crumbs for the unemployed between now and Christmas. How can the latter cost $80 billion more than the former? What's missing in that equation?
Even worse, internal surveys of Senators suggest that while many support the bill, most have issues with the carried interest provision.
Meanwhile, we have a deficit problem. Ben Bernanke's capacity differs, though. He cannot make decisions on spending, but he can do a lot to determine the interest rate environment in our economy. It is a bit obtuse to go to Congress and merely say that our path is "unsustainable," when the opportunity for action is on the table. Thomas Hoenig, President of the Federal Reserve Bank of Kansas City, says that there is "risk in doing nothing."
Ben Bernanke, testifying yesterday on Capitol Hill, said that the U.S. debt is on an "unsustainable path." There is plenty of academic research to support that position. When debt is 90 percent of GDP, countries experience a stall in their growth.
I hate to see Congress pass a bill that passes more debt on to future generations. Young people are not getting a lot in this bill - maybe a few summer jobs over the next few months - but they'll be paying for those corporate tax breaks for years to come.