First, lawmakers have been gradually weakening a provision to close a loophole in tax law that enables private equity fund managers to pay taxes on their income (known as their “carried interest”) at the 15 percent capital gains rate, rather than the rate of ordinary income tax that could range as high as 35 percent.
The House voted to close the loophole completely in December (raising $25 billion over 10 years); House and Senate negotiators weakened it to a partial closing, which the House passed in May (raising $18 billion); and some Senators have now offered a version to weaken it further (raising $14 billion).
Second, a proposal to boost tax compliance may suffer a similar fate. Currently, many small business owners create S corporations, enabling them to re-categorize their wages as business profits and, in the process, greatly reduce the payroll taxes they would otherwise owe on their wages.
In its jobs bill, the House voted in May to prohibit lawyers, accountants, and others who provide services from using S corporations in this way (raising $11 billion over 10 years). In the Senate, however, efforts are afoot to kill this measure.
With all due respect to Krugman, et. al., the problem is not that Washington is suddenly going to move too fast on the deficit-cutting front.
The problem, instead, is that policymakers will not move fast enough when, in the coming years, the economic time is ripe to do so.
Click here to read the previous Capital Exchange post.
Lawrence J. Haas is former Communications Director to Vice President Gore and, before that, to the White House Office of Management and Budget. He's now a public affairs consultant who writes widely about foreign and domestic affairs, including fiscal policy.
