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Published reports indicate that tomorrow (Friday) the U.S. House will be voting on a "tax extenders" package, plus some additional spending.

It's important to note that the Congressional Democrat leadership is rushing this bill to the floor without any legislative language, nor a JCT score at the time this alert was written (mid-Thursday).  However, based on a summary and partial score released by the House Ways and Means Committee, ATR is confident that support for this bill shall be a Taxpayer Protection Pledge violation.

This bill violates the Taxpayer Protection Pledge because it raises marginal income tax rates.  Specifically, it does so in the following two ways:

• It requires capital gains earned as the "carried interest" in an investment partnership to be taxed at one-quarter capital gains rates, and three-quarters ordinary income tax rates.  This bizarre treatment raises the tax rate on these capital gains from 15 percent today to 37.25 percent once the 2001 tax relief expires at the end of this year and Obamacare's investment surtax goes into law in 2013.  This is a 150 percent increase in the tax rate on this important type of capital gains.  The true incidence will be borne by limited investment partners such as defined benefit pension plans, university endowments, and charitable trusts
   
• 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 of 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

It is also entirely possible that this bill violates the Taxpayer Protection Pledge because it is a net income tax increase over the ten-year budget window.  This is not entirely clear without a final score from the Joint Committee on Taxation, however.  Nevertheless, this is quite likely.

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 also be keyvoting the House 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.

Posted by Ryan Ellis on Thursday, May 20, 2010 12:48 PM EDT

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