Teachers, firefighters and cops are being laid off.  Social services slashed.  Subsidies to help the unemployed buy health insurance were deep-sixed in the latest tepid jobs bill passed by the House.

At a moment when new revenues are desperately needed for a serious public investment agenda, job creation, and continued economic recovery, Congress is sounding alarms about the need to shrink the deficit and find cuts, cuts, and more cuts.  It’s insane, inane, and exactly what we don’t need right now. 

Instead, what we do need is a national discussion–front and center–about reforming a tax code that has been rigged via high-priced lobbyists to favor the wealthy at the expense of a struggling middle-class.

 Despite the major shortcomings in its jobs bill last week, the House did take one significant step in the right direction on taxes.  It voted to close one of the most obscene and inequitable loopholes benefiting the richest of the rich–the so-called “carried interest” loophole that taxes hedge fund and private equity managers at a 15 percent capital gains rate rather than an ordinary income tax rate of 35 percent.

That’s right, these mega-billionaires pay a lower rate on the bulk of their income than their administrative assistants–not to mention those same cops, firefighters, and teachers now facing layoffs.  This is morally and economically reprehensible–especially since the corporate tax base has already been severely eroded due to offshoring, tax havens and other quasi-legal tax plans devised by high-end legal and accounting firms. A 2008 GAO report found that two-thirds of US corporations paid zero federal income taxes from 1998-2005. Twenty five percent of the largest US corporations had $1.1 trillion in gross sales in 2005 but paid no federal income taxes.  Where is the debate on corporate tax rates and loopholes?

While Wall Street lobbyists were successful in delaying the start date of the House-approved tax reform to January 1, 2011, and only 75 percent of carried interest will be taxed as ordinary income while 25 percent will still be treated as capital gains, the House deserves credit for showing some moxie.  Industry lobbyists and their benefactors used all of their usual tricks of the trade–including fear-mongering, warning that closing this loophole would kill jobs, hurt minorities, and slow any recovery in the real estate market. 

“This is not a time to raise taxes on investments in business. That’s a sure way to kill jobs,” said Republican Congressman Lee Perry of Nebraska. But the measure passed and will raise approximately $17 billion in urgently needed revenues over the next decade.  It now must survive the Senate where most progressive legislation in these last 18 months has gone to die.

In fact, efforts to close the carried interest loophole have been defeated in the Senate for three years running.  Already Democratic opponents to reform are resisting–and these aren’t your usual Lieberman-Nelson-Baucus suspects, either–Senators Maria Cantwell, Robert Menendez, and John Kerry are just a few voicing objections. Further compromises are already in the works such as taxing only 60 percent of this income at the normal rate, with 40 percent continuing to be treated as capital gains. 

“I think there are some distinctions that ought to be drawn, personally,” said Kerry. “There’s a distinction between long-term, patient, capital formation, with risk, and things that are sort of masquerading as an investment that are fees.”

But John Irons, research and policy director of the Economic Policy Institute, has it right when it comes to these so-called “distinctions.”  He told me, “Work is work. It doesn’t matter if you are a plumber, a firefighter, or a venture capitalist. We should not be giving preferential treatment through the tax code to venture capitalists and hedge fund managers just because they found a way to game the system and ‘pay’ themselves through capital gains rather than ordinary income.”

Then-candidate Barack Obama supported closing the loophole all the way back in July 2007.  He should show some leadership when the Senate returns from recess and takes up the House bill.  After all, this is yet another opportunity for the Democratic party to show that they stand with working people on an issue of fairness that also happens to be a no-brainer politically.

At a time when economic hardship is so widespread, and we have Gilded Age-like income inequality, how is it that that Congress would even think twice about asking the wealthiest and most powerful Americans to start paying their fair share of taxes?  That’s just for starters. The long-term goal must be to overhaul our tax system so that it supports, not subverts, fairness–whether its unlimited deferred compensation for CEOs, tax deductibility of exorbitant CEO pay packages, or closing the carried interest loophole. Without deep tax reform working people in this country will always get shafted.