This week, the U.S. Senate will be voting on a "tax extenders" package, which also includes additional spending.  It also contains billions of dollars in new tax increases.

This bill violates the Taxpayer Protection Pledge because it raises marginal income tax rates, and because it is a net income tax increase.

Specifically, it raises tax rates in the following two ways:

• It requires capital gains earned as the "carried interest" in an investment partnership to be taxed partially at the capital gains rate, and partially at ordinary income tax rates.  This bizarre treatment raises the tax rate on these capital gains from 15 percent today to around 35 percent in 2013, depending on how long the asset is held.  The true incidence will be borne by limited investment partners such as defined benefit pension plans, university endowments, and charitable trusts.  More than doubling the tax rate on investment general partners is bad tax policy and a massive tax hike.

• The bill also for the first time imposes the Medicare payroll tax (soon to rise to 3.8 percent for most small business profits) on small, service-sector Subchapter-S corporations.  This means the top rate on service-sector S-corporations with three or fewer service-providing owners will rise from 35 percent today to 42.6 percent once the 2001 tax relief expires at the end of this year.  The true incidence will be borne by workers, who will see their wages, compensation, and even job slots diminish as capital is drained from company accounts to pay this new tax

Besides raising marginal income tax rates (which by itself would be sufficient to break the Taxpayer Protection Pledge), this bill is also a net tax increase of $18.9 billion, according to the Joint Committee on Taxation.

ATR also opposes this bill on many other policy grounds.  It raises taxes on international-source business and personal income, creating or exacerbating a double-taxation situation.  It increases spending without cutting spending somewhere else.  It raises taxes on some of the most sensitive, job-creating parts of our economy.

For these and other reasons, ATR will be keyvoting against the tax extenders bill in our annual Congressional scorecard.  ATR considers a vote for this bill a vote against taxpayers, and will negatively score a vote for this bill.

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Posted by Ryan Ellis on Monday, June 14, 2010 12:43 PM EDT

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