Democrats Pessimistic on Tax Cut: “We’ve Got What We’ve Got for the Next 30 Years”

Democrats were universal in their hostility toward the tax cuts, but the party has not yet formulated its response nor have they suggested what they'll do when and if they return to power.

WASHINGTON, DC - NOVEMBER 14:  Senate Minority Leader Charles Schumer (D-NY) and Sen. Maria Cantwell (D-WA) (R) talk to reporters following the weekly Senate Democratic policy luncheon in the U.S. Capitol November 14, 2017 in Washington, DC. Senate Republicans are considering including a repeal of the Obamacare individual mandate as part of their proposed tax cut and reform legislation, which they want to pass the week after the Thanksgiving holiday.  (Photo by Chip Somodevilla/Getty Images)
Senate Minority Leader Charles Schumer (D-NY) and Sen. Maria Cantwell (D-WA) (R) talk to reporters following the weekly Senate Democratic policy luncheon in the U.S. Capitol November 14, 2017 in Washington, DC. Photo: Chip Somodevilla/Getty Images

In December, Republicans achieved their long-held dream of lowering taxes for the wealthy and corporations and increasing taxes for pretty much everyone else.

Democrats were universal in their hostility toward the project, but as the Trump administration has pulled off a PR coup — with companies announcing “Trump bonuses” and workers seeing bumps to their take-home pay — the party has not yet formulated its response nor have they suggested what they’ll do when and if they return to power.

In interviews with The Intercept, a range of Democratic senators either said they have not yet thought about what repeal and replace would look like, or offered broad guidelines for a policy, rather than specific plans.

“Not yet,” replied Virginia Sen. Tim Kaine, who served as the party’s vice presidential nominee in 2016, on whether he’s put any thought into how they would replace the tax law. “Too many other things that are coming before that.”

Republicans began promising to repeal the Affordable Care Act before it had even been signed into law, but devoted no serious effort to developing a replacement, a failure that contributed to their inability to repeal it once they took power.

Hawaii Sen. Brian Schatz concurred with Kaine. “Not yet,” he said in response to the question.

Montana Sen. Jon Tester didn’t have any specific ideas in mind, but offered some principles the party should look at. “It wouldn’t increase the debt on our kids by a trillion-four, and the middle-class tax breaks — what we have would be permanent,” he said.

He was, however, fairly pessimistic about any changes happening in the near future. “There are a lot of things that could be changed in that, but I don’t see any effort to do any of those things,” he conceded. “I think we’ve got what we’ve got for the next 30 years.”

Ed Markey of Massachusetts offered the most detailed principles for a replacement. “I would make sure that 60 to 70 percent of the tax break went to people who earned $200,000 or less,” he replied, “so that it was benefiting the people who work hard every day. They deserve a real tax break.”

Vermont Independent Sen. Bernie Sanders has been among the most precise, saying he would roll back the breaks for the rich, keep the new deductions, and restore some of the old ones. “We can permanently double the standard deduction, expand the Earned Income Tax Credit, reinstate the personal exemptions, and make the Child Tax Credit fully refundable,” Sanders said in a statement.

While Capitol Hill has few ideas on what a different restructuring of the tax code would look like, a number of economists offered their own ideas to The Intercept.

Over at the Economic Policy Institute, budget analyst Hunter Blair said the tax law is an opportunity to set up a progressive response. “Progressives should use [this bill] as a springboard for real progressive tax reform. That would be reform that raises revenue that we need to honor and expand our commitment to Medicare, Medicaid, and Social Security, and other social insurance programs, and doing so progressively,” he said.

He suggests the Congressional Progressive Caucus’s budget blueprint as one model for repeal and replace. That budget would impose a financial transaction tax, increase tax rates on the highest earners, and establish a “hard work tax credit” for households with a family income of less than $150,000.

Dean Baker, senior economist at the Center for Economic and Policy Research, doesn’t think the law is all bad. “There’s actually a lot of good aspects to this,” he said. For instance, he thinks the simplicity of nearly doubling the standard deduction is beneficial for Americans. “Why should people mess around with itemizing? … I’d love to carry it a step further and let the IRS do people’s tax forms for them.”

There are at least two big areas where he thinks there could be significant changes, however. He points to the lowering of corporate tax rates, noting that there was bipartisan support for lowering them in a revenue-neutral fashion rather than the deficit-increasing way the GOP has chosen.

“The idea of lowering the rates and getting rid of deductions, Obama came out for that, a number of Democrats that were on board with it,” he noted. “If [they] had on the table the idea that we’re going to actually collect, we’re going to set a rate of 25 percent or whatever, and we’re actually going to collect something very close to it, that I think would be really good policy.”

His specific proposal would involve the government acquiring shares in companies. “You require the company to give you nonvoting shares in the percentage that you’re going to have as the tax rate. So if you want 25 percent as your tax rate, they give you shares that are equal to 25 percent of their outstanding shares.”

Baker thinks this would cut down on tax avoidance. “Whatever at the end of the day you pay to your shareholders, you’re going to pay the government also,” he said.

He is also concerned about possible cutbacks in state and local spending as a result of losing the state and local tax deduction. The SALT deduction essentially serves as a subsidy to municipalities and states, and tends to be more important to blue states who have higher levels of spending. Because taxpayers who claim the deduction aren’t taxed twice, states feel free to spend higher amounts.

Baker’s idea is for states to levy a payroll tax on employers. He imagines a well-to-do taxpayer in California who owes $10,000 in property taxes.

“What you’re saying is now instead of having them be taxed $10,000 in income taxes, which they could deduct, what we’re going to do is we’re going to tell the employer, you owe us 5 percent payroll tax,” he said. “Employer will say, ‘OK well fine, if I have to pay 5 percent tax on this guy’s payroll, then I’m only going to pay him or her $190,000 rather than $200,000. So they’re out $10,000 that way, but that was the same amount they were out on the state … tax. The benefit is now they’re only paying federal income tax on $190,000 on income rather than $200,000 on income. So in effect, what you’ve done is substituted a deductible tax for a tax that wasn’t deductible.”

There’s also a more radical approach to repeal and replace offered by economists of the Modern Monetary Theory school, who argue that the federal government does not need to rely on taxation in order for revenue.

Randy Wray of Bard College, one of the leading MMT economists, thinks the new tax law could lead to unfair outcomes — such as for states more burdened by repeal of the SALT deduction. But he doesn’t necessarily oppose lowering the corporate tax rate; in fact, he thinks that needs to go further.

The corporate income tax, in Wray’s telling, “encourages avoidance, and evasion, and inversions and all of those problems. In a way they’re greatly reduced, I wouldn’t say that they go away, but they’re greatly reduced if they just eliminate the corporate tax.”

He suggested making the corporate tax rate zero and then imputing the profits to shareholders. You could then tax that money as ordinary income. You could then use this as a way to encourage companies to invest in the economy rather than use the money for stock buybacks. “What you would do is encourage them to invest by saying that profits that are invested are not imputed, they will not be taxed,” he said. “It removes the incentive that corporations right now have to go into debt because they get to write off interest payments from their profits. So we eliminate that incentive because if you invest your profits, those never get taxed either.”

This plan would also have the advantage of being progressive, because of who owns stocks.

Top photo: Senate Minority Leader Charles Schumer, D-N.Y. and Sen. Maria Cantwell, D-Wash., right, talk to reporters following the weekly Senate Democratic policy luncheon in the U.S. Capitol on Nov. 14, 2017 in Washington, D.C.

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