Two years after Republicans threatened to pay for a tax cut for upper-income Americans by closing loopholes that let the wealthiest people in the country avoid paying as much in taxes as hard-working Americans, a group of Senate Democrats on Wednesday proposed a very different form of tax reform in which the government would crack down on the so-called “tax expenditures” that let the rich avoid paying more in taxes than the middle class or the poor.
The Tax Reform: Taxpayers First Act, the more than 60-page plan, unveiled by Senate Democrats Chuck Schumer and Jon Tester of Montana and Kamala Harris and Dianne Feinstein of California, would target the corporate income tax as well as the IRS. Although Republicans in Congress say that the system needs reform, House Ways and Means Committee Chairman Kevin Brady, R-Texas, has said in the past that reforming the corporate tax code is “not the right vehicle to reform the individual tax code.”
Under current law, corporations pay at the “business income” rate — roughly 23 percent — on income earned before deductions and capital gains, but the Tax Reform: Taxpayers First Act would put the burden back on shareholders.
The bill’s proposal would impose “effective taxes on capital gains, dividends, and stock options, not dividends and stock options as they are currently taxed in the corporate income tax. It would also restore a progressive consumption tax and leverage that revenue to finance (by reducing regressive tax expenditures) a permanently lower rate for middle-class working families,” according to the bill’s supporters.
They also proposed ensuring all public employees are paid at least the minimum wage and increasing the minimum wage for tipped workers — a proposal Democrats first made in their 2014 campaign platform.
In theory, the bill would hurt the already-taxed rich. At least for some. Only one tax expenditure is targeted directly at people earning more than $250,000 a year: an “inverted” marriage penalty on investments. The bill would only repeal that tax subsidy for families earning more than $200,000, and it would remain in place for couples earning between $150,000 and $300,000.
The key point of contention in tax policy generally is always the rich paying more in taxes than the middle class. In recent decades, Democrats have favored higher taxes on the rich to shrink the federal deficit, while many Republicans favor tax cuts to stimulate the economy. The concept of “progressive taxation” typically means paying as much in taxes as possible to reduce the total amount of taxes paid, a point that Republicans often push back on.
But “progressive taxation” also covers the wealthy in ways that allow them to pay taxes at a smaller percentage than people earning less. For instance, the highest 1 percent of earners pay roughly 29 percent of the income tax, according to Tax Policy Center estimates. The middle 50 percent pays 41 percent.
Besides changing how much tax the rich pay, the Tax Reform: Taxpayers First Act also contains a set of $223 billion in spending cuts over the next decade. Among the cuts are about $80 billion in cuts to programs that Democrats say help low-income people.
Tax cuts currently scheduled to expire at the end of 2025 — which President Donald Trump has embraced — are also included. While many Republicans in Congress have called for these tax cuts to be extended, they are otherwise known as “bipartisan” spending cuts. Democrats have historically opposed these so-called “extenders” as a way to chip away at the deficit.
The bill is still in draft form. The three senators who sent out a summary of the proposal immediately after it was published did not say when the bill would be introduced. It is unlikely to pass the Senate on its own. More likely, it would be combined with a bill from Rep. Richard Neal, D-Mass., that also seeks to roll back some of the most popular “tax expenditures.”
Such a proposal would be designed to draw more support from Democrats. But the Neal bill has not generated enthusiasm on Capitol Hill. It has lost a quarter of its original 21 Republican co-sponsors, and just 18 of those original co-sponsors are now in the majority. Some conservatives have even said they oppose the bill.
Two Republican senators from states with significant populations of upper-income residents, John Kennedy of Louisiana and Susan Collins of Maine, have also said they would support lower taxes for the middle class. But they oppose getting rid of any “tax expenditures” that are seen as making the tax code less progressive.