Wall Street Journal Editorial
July 31, 2007

With a new Democratic majority, the agenda on Capitol Hill has shifted abruptly this year, and no more so than on taxes. For a decade the focus in Congress was which taxes to cut. Now everywhere you look someone running the Congress, or running for President, is proposing to raise taxes on some industry or group of Americans.

The proposals are coming so frequently that it's hard to keep track without a scorecard. So as a reader service, and with a tip of the hat to Ed Hyman's ISI Group for some of the details, here's a list of the most notable proposals so far:

• A Senate Finance Committee plan to raise the federal tobacco tax by 61 cents to a total of $1 a pack to finance the Schip health-care expansion. The Senate figures this will raise $35 billion in revenue over five years, if you choose to believe this tax increase won't produce even more tax-free cigarette sales from Indian reservations.

• The so-called Blackstone tax on private equity partnerships that go public, raising their 15% rate to the regular corporate tax rate of 35%. This bipartisan Senate proposal hasn't been scored yet for revenues but may well pass Congress.

• A tax increase on the "carried interest" of hedge funds and private equity to 35% from 15%. This has been introduced in the House and endorsed by Ways and Means Chairman Charles Rangel and the major Democratic Presidential candidates.

New York Senator Chuck Schumer tells the New York Times that he'll oppose this unless the tax increase also applies to real estate and other partnerships that also now pay the 15% carried interest tax rate. To put it another way, Mr. Schumer is saying he'll only support the higher tax rate if it applies to more people. Meanwhile, by playing this "good cop" role, Mr. Schumer is raising millions of dollars in campaign contributions from hedge funds and private equity for Democratic Senate candidates running in 2008. Brilliant.

• Higher withholding taxes on the U.S. subsidiaries of foreign companies--in essence a tax increase on foreign investment in America. This $7.5 billion tax proposal from Texas Democrat Lloyd Doggett came out of nowhere last week to appear in the House farm bill to pay for more agriculture subsidies. It passed.

• Raise the capital gains rate to 28% from the current 15%. This would repeal not only the capital gains tax cut of 2003 but also the tax cut (to 20% from 28%) that Bill Clinton signed into law in 1997. Presidential candidate John Edwards proposed this 86% increase in the capital gains tax last week, and he's been echoed in recent days by such Democratic tax sachems as Alan Blinder and Leonard Burman. Mr. Blinder thinks capital gains should be taxed no differently than regular income, which means the tax rate would rise to 39.6% if the 2003 tax cuts expire in 2010. The last time the U.S. had a capital gains rate that high was 1978--the Jimmy Carter era.

• Deny the domestic manufacturing deduction to oil producers. This is part of the Senate Finance Committee's energy bill and is estimated to raise $11.4 billion over 10 years. How this will increase domestic oil production amid $77-a-barrel oil and widespread clamor for "energy independence" is one of those mysteries that Congress prefers not to explain.

• A levy on oil and gas produced from deep-water leases in the Gulf of Mexico. This tax on domestic energy production is also part of the subsidy-fest known as the House farm bill and would allegedly raise $6.1 billion.

• A tax surcharge of 4.3 percentage points on income of more than $500,000, which would take the top marginal rate to 39.3%. A leading tax writer on Ways and Means, Massachusetts Democrat Richard Neal, promoted this idea in June as a way to prevent this year's increase in the Alternative Minimum Tax. Mr. Neal told the Washington Post that his plan had broad support from Democratic leaders and that "Everybody's on board." Other Democrats balked after that story appeared and Mr. Rangel told us not to believe it, but something's clearly in the air because Democratic tax guru Mr. Burman is also pushing a four-percentage-point income tax surcharge to pay for AMT relief.

We're probably overlooking some other tax increase proposals, and some of the above will be blocked this year by President Bush's veto pen. But this kind of manic Congressional grasping at any and every revenue idea hasn't been seen since the first days of the Clinton Presidency.

It's all the more remarkable given that federal tax revenues as a share of GDP are currently above their modern historical level. The latest budget estimate is that fiscal 2007 revenues will reach 18.8% of GDP, compared to the 40-year historical average of 18.3%. Tax revenues this year are rising by nearly 8%, following increases of 11.8% in 2006 and 14.6% in 2005. The budget deficit is down to 1.5% of GDP, and falling. But apparently Democrats still think Americans are undertaxed.

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