Raising Revenue Responsibly

This article was published on the History News Network

 http://hnn.us/articles/how-solve-fiscal-cliff-problem-responsibly

There are three legs to the stool of Federal Fiscal Solvency - Cut spending, entitlement reform, and revenue generation. Few of the Washington power players are realistically discussing any of these, but revenue has generated the most polarized rhetoric.

All our lives are impacted by the way our Federal Government raises the $2.9 trillion it needs to function. That is why it is important that any revenue element of a “Fiscal Cliff” deal is weighed not only for the amount, but for its “tax incidence”.

“Tax incidence” charts the various ways government amasses its revenue and how these ways impact individuals, industries, demographics, and “geographics”. Our current “progressive rate” income tax system and the strategic reform proposals of the flat tax, fair tax, and Value Added Tax (VAT) all generate significantly different impacts on our individual spending habits and our overall national economy.

Tax policy punishes or promotes economic activity either with intended or unintended consequences. Government tax policy has become social policy, resulting in an amazingly complex and voluminous tax code. The federal tax code is over 5.6 million words or 3,458 pages – seven times longer than the Bible, depending on the edition. Each page, sentence, phrase, and punctuation of this Tax Code, and its countless regulations, instructions, and manuals, determine winners and losers within the economy. These regulations are further subject to equally voluminous interpretation through administrative and judicial rulings.

There are nearly an infinite number of ways individuals, companies, and an array of other entities, can navigate this tax landscape. Lost in this morass is the original intent for many of these pathways and how they are supposed to positively guide economic behavior while raising desired revenue.

Democrats obsess over raising tax rates on the wealthy, and Republicans remain vague about “tax reform”. Thankfully, one person has conducted a detailed review of the Federal Tax Code and found $992 billion in possible tax saving/new revenue over the next ten years – without raising tax rates.

In July 2011, Senator Tom Coburn (R-OK) issued his “Back in Black” report. http://www.coburn.senate.gov/public/?p=deficit-reduction

“Back in Black” is a 624-page detailed, line by line, analysis of how the Federal Government can cut waste, achieve operational efficiency, and find the revenue needed to get out of debt.

Coburn’s final section (pages 558-624) addresses how decades of tax policy decisions have created a multitude of opportunities for special interests to avoid taxes, or obtain tax incentives and subsidies, while harming the general populace (pushing the tax burden onto others and driving up the debt).

Reviewing some of Senator Coburn’s examples of how our tax code runs amok is instructive and sobering. Coburn’s ideas represent the most economically neutral opportunities for new revenue and should be part of any strategic “Fiscal Cliff” agreement.

Subsidizing millionaires - Individuals with over a million dollars in income benefit from more than $7 billion in tax relief annually through the mortgage interest deduction. Under current law, homeowners can deduct the interest paid on home mortgages for primary residences and vacation homes loans of up to $1 million, resulting in lost federal revenue of nearly $88 billion. Even a yacht can be considered a second residence—as long as the luxury boat has a “sleeping, cooking, and toilet facility” and an individual lives in it for at least two weeks a year.

Subsidizing foreigner gamblers - Americans must pay taxes on their winnings at horse and dog tracks in the United States, but not foreigners. This deprives the Federal Government of $30 million over the next ten years.

Subsidizing Hollywood – In order to encourage Hollywood to produce feature films and television programs in the United States, entertainment companies may deduct up to $15 million in certain costs associated with the production of television episodes and movies where at least 75 percent of the compensation costs are for work performed on U.S. soil. Allowing Hollywood to benefit from this accelerated cost recovery results in federal revenue losses of at least $30 million a year.

Allowing fraud - Within the Additional Child Tax Credit (ACTC), individuals without a valid Social Security Number (SSN) claim $1.780 billion a year, or $17.8 billion over ten years. Congress has not provided the IRS with adequate authority to deny these fraudulent claimants.

No documented impact – The 1993 Government Performance and Results Act (GPRA) is supposed to hold every federal activity accountable for actually achieving intended results. GPRA is routinely ignored, not only for federal expenditures, but for tax expenditures. Two examples are Empowerment Zones (EZs) and Renewal Communities (RCs). EZs and RCs are federally designated poverty or distressed areas where businesses and local governments receive federal grants and tax incentives in exchange for locating and developing in these zones. Nearly $1.8 billion in grant incentives provided to EZs and RCs have been allocated since 1993. However, the Government Accountability Office (GAO) and the Inspector General at Department of Housing and Urban Development (HUD) have not found any tangible improvement in community outcomes.

Bailouts without end - The IRS has excluded major Troubled Asset Relief Program (TARP) recipients from certain tax obligations for potentially the next 20 years. These TARP recipients may avoid paying more than $90 billion combined in taxes because of this special tax treatment. This includes AIG, which has accumulated over $25.6 billion in carry-forwards and other tax-deferred assets; New GM, which will avoid as much as $45.4 billion in taxes because of the Treasury Department‘s exemptions; and Citi, which will use $23.2 billion in carry-forwards and other credit carryovers in just one year.

Malfeasance - The Internal Revenue Service found nearly 100,000 civilian federal employees were delinquent on their federal income taxes, owing over $1 billion in unpaid federal income taxes. The federal government has also failed to collect more than $62 billion in penalties owed by swindlers, criminals and others cited for violating federal laws and regulations and this amount has increased dramatically.

It is truly sad that none of these issues were discussed during the 2012 campaign. Republicans, in particular, could have avoided being branded as coddling millionaires. Each side is equally guilty of over politicizing these serious management and economic issues. The fact that Senator Coburn’s published report has remained in the policy wilderness for the last seventeen months is unconscionable.

Reality Check

Politicians from across the political spectrum are scrambling to find new and unique ways to be on the “change” bandwagon. These politicians, and their handlers, all sense how the American public has soured on Washington, DC and politics as usual.

It would, therefore, be instructive to get a “reality check” on some of change agenda promised during the 2006 campaign and supposedly implemented, with great fanfare, at the beginning of the current Congress:

Reality Check #1 – Independent Voices
Numerous Democrats were swept into Congress in districts that usually voted Republican. Many of these Democrats got elected promising to remain independent and not to vote in lock step with Pelosi and the liberal leadership in Congress. Guess what, they ended up voting in lock step with Pelosi. But they found a wonderfully innovative way to disguise this fact. Every day these “independent” Democrats vote against the adoption of the previous day’s journal. This meaningless roll call vote on the Congress Record often serves as a quorum call to begin the legislative day. However, since it is a leadership initiated vote a “no” vote drives down a Member’s “party loyalty score”. I give The Washington Post credit for blowing the whistle on this scam. I hope voters remember it as the campaign progresses.

Reality Check #2 – The Ethics Reform Act of 2007
The era of lavish lobbyists “wining and dining” Members was over! Not really. Four days after the legislation was passed, Rep. John Conyers (D-MI) slipped some legislative intent language into the Congressional Record. This after-the-fact language allowed the House Ethics Committee to rule that lobbyists can still “wine and dine” Members at this year’s National Party Conventions if (1) they hold a reception honoring more than one Member, (2) their dinners and receptions are paid for through a third party, and (3) they are held after the convention adjourns for the day. In the last instance, wouldn’t a party normally be held after hours? This after-the-fact legislative intent intentionally created these loop holes in the law. It makes a travesty of lobbying reform and disclosure. We still have five months to demand an end to this sham.

Reality Check #3 – Campaign Finance Reform
Rules banning donations from corporations, unions, and large nonprofits being used to pay stipends to Senators and Congressmen. However, these rules do not ban such payments to spouses and other family members.
· The campaign Senator Barbara Boxer (D-CA) paid her son $320,409.
· The campaign of Senator Mike Enzi (R-WY) paid his daughter-n-law $306,718.
· The campaign of Senator Jim Bunning (R-KY) paid his daughter $138,933,
· The campaign of Senator Michael Crapo (R-ID) paid his wife $78,514.
· On the House side, 72 Congressmen funneled over $5.1 million in corporate and labor campaign donations to family members.
Efforts to close this major loophole were rejected in Congress without any media outcry.

Reality Check #4 – Lobbyist Influence
All three Presidential contenders have pledged to fight special interests and distance themselves from Washington lobbyists. However, lobbyists are key figures in the campaigns of Clinton, Obama, and McCain. On February 26, 2008, The Washington Post’s “In the Loop” section published a stunning list detailing millions of dollars being funneled by lobbyists and industry groups into all three campaigns. Most disturbingly, for all three campaigns, law firms, the backbone of the Washington lobbyist establishment, led the list of donors.

We have eight months before the election. That should be plenty of time for the media and the general public to demand an accounting of these and other lapsed promises before we vote for anyone.

Lobbying’s Seven Deadly Sins

Many people ask me about my assailing Washington lobbyists. They also challenge me on whether there are any “good” lobbyists.

There have always been people who have acted as intermediaries between those in power and the general populace. This role has been filled by squires to knights, and courtiers to kings. During the Administration of President Grant these intermediaries mixed and mingled in the grand lobby of the Willard Hotel in Washington, DC and thus became known as “lobbyists”.

Lobbyists serve an important role. Not everyone can spend the time learning the Byzantine ways of our nation’s capital. Therefore, citizens, companies, and interest groups hire people who can craft legislation, testimony, and strategies to successfully promote a point of view. At the same time public officials seek out these very same lobbyists to help distill vast quantities of often conflicting information and advocacy arguments.

As government gets more complex and more pervasive citizens, those outside of Washington power circles increasingly require help from those who are part of these Washington power circles.

This is where things can go astray and democracy can be undermined.

First, lobbying is a business. That means those with the financial resources will gather more and better lobbyists than those who lack those resources. This marketplace for influence can undermine just causes in favor corrupt ones. Dictators have more money than revolutionaries, corporations have more resources than consumers, Lobbyists follow the money, and therefore, justice and morality take a back seat. I have many friends who tried lobbying and left the profession because it made them feel “unclean”. “The deserving can’t pay and the undeserving can,” explained one former lobbyist.

Second, lobbying is self-perpetuating. Lobbying is all about reaction. The trick is to do enough for a client to solve their immediate problem, but not enough to prevent future problems. If a problem goes away permanently, so does the client and the fees. Therefore, lobbyists seek remissions not cures for their clients.

Third, lobbying promotes more government. Even industry lobbyists rather seek special exemptions and subsidies over dismantling regulations. In 1979, Chrysler sought a government bailout, instead of using its crisis as a catalyst for regulatory reform. When conservatives raised this issue with the Chrysler lobbyists they just scoffed at the idea of regulatory reform over government relief.

Fourth, lobbying can be antidemocratic. Many lobbyists are hired to thwart the implementation of laws passed by Congress. I know one lobbyist who spent twenty years hampering the implementation of unleaded gasoline just so their company could extent their profits.

Fifth, lobbying is hidden. No matter how much Congress and the media talk about disclosure and ethics there is no way the public will ever know what really happens. Washington, DC is a very small town. There is no more than one or two degrees of separation between those who make decisions and those influencing those decisions. The power elite belongs to the same clubs, gyms, private schools, churches, or live in the same neighborhoods, and even the same condominiums. Such informal interactions happen constantly. So no matter how much a former official is banned from direct lobbying, they can be lobbying a colleague when they sit next to each other at a theatrical or sporting event.

Sixth, lobbying is ultimately about favoritism. The object of lobbying is to grant special treatment beyond what is officially allowed. There are certainly many lobbyists who promote issue oriented causes where their role is to strategically influence the legislative and regulatory process. These might be considered the “good lobbyists” as they give a voice to thousands of citizens in the Washington power circles. However, for every “good” lobbyist there are dozens of lobbyists who use government for individual interests against the general good.

Seventh, lobbying is addictive. Elected representatives approach lobbying like a drug addict. Some can take “one puff” and leave it alone, but most are hooked from the start. The more lobbyists assist an elected representative, the less likely that representative will want to hear from the electorate. The longer they are in Washington, elected representatives make a wonderful show of listening to their constituents, but actually key off of lobbyists, and then mask their true actions from the public. Lobbyists are more “user friendly” than sorting out what the electorate wants. Lobbyists can provide countless perks, many of them totally hidden from the public.

There is actually a term for this – “silver bullets”. These are special favors, include getting a child into a private school, making sure the representative or their spouse is appointed as a trustee to prestigious foundation, or promising a job with a corporation or with the lobby firm after they leave office. The “prid pro quo” can never be proven.

Lobbying may be a “necessary evil”. It will be part of government and Washington for the foreseeable future. We need to find ways to foster its the good side while effectively restricting its many abuses.