Failed a procedural vote in the Senate which killed this version of the bill: 12.06.07
The Legislation:
The Temporary Tax Relief Act of 2007 is a one-year extension of tax exemptions and credits with offsetting tax increases targeted at wealthy equity fund managers. The act prevents the extension of the Alternative Minimum Tax (AMT) to more than 20 million middle-class taxpayers. The AMT was enacted in 1969 to ensure that the richest Americans were not able to avoid paying taxes. However, because the AMT is not indexed for inflation, households making as little as $45,000 a year and individuals making as little as $33,750 a year would be subject to tax increases on their 2007 returns. The bill increases the AMT exemption to $66,250 for joint filers and $44,350 for individuals. The legislation also extends and increases tax credits that offset both the AMT and the regular income tax such as the child tax credit and the credit for payment of state and local taxes.
The Tax Relief Act offsets the costs of the AMT “patch” (so-called because it is only a one-year extension instead of an overhaul) and the tax credit extensions by increasing the tax on carried interest, the fee paid to hedge fund and private equity managers for supervising investments. Under this legislation, carried interest would be taxed as earned income rather than capital gains, which are taxed at a significantly lower rate. The bill also closes a loophole that allows executives to accumulate large sums of tax-free investment returns by deferring their compensation to a later date. Further revenue-raising measures include delaying implementation of an expanded foreign tax credit and strengthening current laws to ensure that wealthy individuals are unable to avoid tax payment by renouncing U.S. citizenship. Finally, the Tax Relief Act prohibits the IRS from contracting out debt collection to private companies. The total cost of the tax bill is $80.7 billion; completely offset by revenue gains of $80.7 billion.
The votes included here concern the House version of the bill, which passed the House and failed to overcome a filibuster in the Senate. A version amended by the Senate, which did not include the closure of tax loopholes, is not considered in this analysis.
The Middle-Class Position:
The Middle Class Supports. The Temporary Tax Relief Act of 2007 ensures that middle-class Americans are not overwhelmed by a tax that they were never intended to pay. An increase of approximately $3,000 in tax payments for more than 20 million American homes would be disastrous for families already reeling from home foreclosures, high gas prices, and nearly stagnant wages. The bill’s tax credit increases and extensions, including credits for college tuition and for improving public schools in economically distressed areas, benefit current and aspiring middle-class families. The legislation also spares families who have lost their homes to foreclosure from large income tax bills that would result from their mortgage debts being voided. This provision provides relief for households engulfed by the housing crisis that would otherwise be subject to large tax bills even after losing their homes. The bill’s revenue-raising tax hikes target the appropriate group: extraordinarily wealthy hedge fund and private equity managers who have exploited loopholes in the tax code to avoid paying their fair share of taxes.
Finally, the Tax Relief Act’s prohibition of debt-collection contracts between the IRS and private companies, a ban suggested by the IRS’s taxpayer advocate, will put a stop to the harassment of lower- and middle-income taxpayers that resulted from the unaccountable, inefficient, and expensive outsourcing of a public function to the private sector.
From the Experts:
“Private investment companies, organized as hedge funds or private equity firms, have recently grown into major economic forces in the U.S. economy… In addition to being unregulated, these financial institutions also reap substantial benefits from special tax provisions…The professional fund managers of these hedge funds and private equity firms are allowed to treat a substantial portion of their compensation as capital gains, meaning they are most likely taxed at 15% rather than the 35% rate that applies to ordinary income such as wages and salary… These super rich fund managers do not need and certainly do not deserve special tax breaks.”-Randall Dodd, Economic Policy Institute (July 24, 2007)
“In a tax code with no shortage of ironies, the alternative minimum tax (AMT) stands out. Created by Congress in 1969, it was aimed at millionaires, but relatively few millionaires pay it. It is billed as a low-rate levy, but most of its victims face higher taxes because of it. It undermines two widely lauded reforms of the income tax—restoring both bracket creep and the marriage penalty. At first glance, the AMT may seem simple and fair. But for reasons nobody imagined when it was created, the AMT bull's-eye hangs not on folks with Cayman Islands bank accounts, but on upper-middle-income families with lots of kids who happen to live in high-tax states. And it doesn’t just raise their taxes. It plagues them with mind-numbing complexity.”-Leonard E. Burman, Tax Policy Institute (October 29, 2007)
“I believe the PDC [private debt collection] program risks too much for too little. In 1998, Congress enacted significant taxpayer rights protections to guard against overzealous IRS collection tactics. Now, less than ten years later, the IRS is outsourcing tax collection to private companies with a profit motive to extract every dollar possible from taxpayers…Private collectors are constitutionally barred from discussing collection alternatives with taxpayers who cannot afford to make full payment, and this restriction further highlights a significant limitation of the program.”-Nina E. Olson, National Taxpayer Advocate for the Internal Revenue Service (May 23, 2007)
Number of taxpayers affected by the AMT in 2006, with the exemption that is extended in this legislation: 3.5 million
Number of taxpayers who will be affected by the AMT in 2007 if this legislation is not enacted into law: 23.4 million
Average compensation paid to the 25 individual hedge-fund managers with the highest earnings in 2006: $570,000,000
Approximate loss of revenue to the U.S. Treasury in 2006 alone from taxing the carried interest of these 25 fund managers as capital gains: $1,995,000,000
Amount that the IRS estimates it will spend in startup and ongoing maintenance costs through FY2007 for the private collection agency program: $71 million
Revenue the IRS estimates it would generate if it applied this $71 million to its own IRS Automated Collection System: $1.4 billion
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