Boosting the corporate tax rate, eliminating carried interest
and modifying the pass-through provision are among the possibilities Democrats
are discussing
Aug 23, 2018 @ 2:34 pm
By Bloomberg News
Republicans thought the historic
overhaul that slashed taxes would be one of their main campaign selling points
ahead of November elections. Instead, Democrats are talking more about the law
— and how they want to undo it.
In their bid to retake control of
Congress, many Democratic candidates are pointing to the $1.5 trillion tax cut
— and what they say are its exclusive benefits for corporations and wealthy
individuals — as a roadblock to expanding benefits like Social Security and
Medicare. Chipping away at some of the law's costly provisions will help to
fund those programs, they say.
"Democrats are able to go on the
offense rather than be on defense," said Celinda Lake, a Democratic
pollster.
While Democrats are campaigning
against the tax cut, Republicans have been quietly shelving it and focusing
more on cultural and social issues such as immigration. Polls consistently show
less than half of Americans approve of the tax cut.
There isn't a formal list of
agreed-upon tax policy changes, but some specific targets are emerging from
discussions taking place within Democratic circles, including raising the
corporate rate above 21% and changing the treatment of capital gains and carried
interest. Other proposals, like repealing the new cap for state and local tax
deductions and modifying the tax break for business owners, are proving to be
more divisive.
So far, Democratic leaders have urged
candidates to campaign on the issues they think will resonate in their
districts, which has led to a wide array of messages. Rep. Richard Neal of
Massachusetts, the top Democrat on the tax-writing House Ways and Means
Committee, has been hesitant to put out an economic plan while in the minority.
And the House's agenda will also be shaped by whoever serves as speaker if
Democrats regain control.
Polling, fundraising and voter
turnout in primaries indicate Democrats have a good shot of taking control of
the House but have a much tougher road gaining a Senate majority. If Congress
is split, any tax legislation that House Democrats pass would likely die in the
Senate or face a veto from President Donald J. Trump. But a House Democratic
tax plan could serve as a blueprint for the changes the party would push for if
it regains the Senate or wins back the White House in 2020.
Here are some of the tax provisions
on the Democrats' radar:
Increase Corporate
Tax Rate
Democrats are finding success —
particularly among blue collar workers over 50 — by tying the corporate tax
cuts to future reductions in Medicare, Medicaid and Social Security, Ms. Lake
said.
Slashing the corporate tax rate to
21% from 35% is estimated to cost $1.3 trillion over the next decade, according
to estimates from the nonpartisan Joint Committee on Taxation. Increasing the
rate, by at least a few percentage points, is likely to figure in Democrats'
sights as a way to offset the costs of other investments.
In an infrastructure plan released in
March, Senate Democrats called for a 25% corporate rate. More moderate House
Democrats, including Mr. Neal, have said they're supportive of a rate in the
mid-to-high 20s. Rep. John Delaney, a Maryland Democrat who is running for
president in 2020, has called for increasing the corporate rate to 23% and
using additional revenue to fund infrastructure.
Hike Capital Gains
Rates
The tax law didn't change the
treatment of capital gains, but the Treasury Department is looking at whether
it has the power to cut tax bills for investors who have investment income.
Democrats are already blasting the proposal, and a group of Senate Democrats
wrote a letter to Treasury Secretary Steven Mnuchin, urging him not to index
the gains to inflation.
Sen. Ron Wyden of Oregon, the top
Democrat on the Senate Finance Committee, has called for increasing the capital
gains tax levy above the current 20% rate. Sens. Bernie Sanders, a Vermont
independent, and New York Democrat Kirsten Gillibrand have pushed for a 0.5%
tax on stock trades and 0.1% tax on bond trades, which could greatly increase
the cost of high-frequency and high-volume transactions.
Both represent plans to target
wealthy individuals and raise revenue that could help finance a major change,
such as a Medicare-for-All program, advocated by Alexandria Ocasio-Cortez, who's
running in New York, or tuition-free college. But a substantial increase in
those rates could be a dealbreaker for many donors, as well as more
business-friendly Democrats.
The math is complicated if Democrats
want to fully fund the government, plug the revenue lost by the tax law and
create new programs, said Frank Clemente, executive director at Americans for
Tax Fairness.
"If you add all those things up,
it will be trillions of dollars," Mr. Clemente said. "I'm not sure
anything lends itself to a bumper sticker."
Repeal Carried
Interest Break
Eliminating special tax treatment for
the profits hedge fund and private equity managers earn, known as carried interest, is also at the top of many
Democrats' tax to-do lists.
Mr. Trump had previously vowed to end
the provision that allows fund managers to pay capital gains rates, instead of
higher ordinary tax rates, on much of their earnings. Instead, the tax law just
extends the period — to three years from one year — that managers have to hold
the assets for before they can qualify for the break.
Carried interest is politically
easier to take on by Democrats and harder for Republicans to defend, according
to Jason Fichtner, an associate director at John Hopkins University's
international economics and finance program.
Even though it would score political
points, rolling back the provision would only raise about $19.9 billion over a
decade, according to the Congressional Budget Office, a relatively small amount
that would fund a small fraction of Democrats' possible economic policies.
Revise Small Business
Taxes
Modifying the law's generous tax
break for so-called pass-through entities, whose owners report their
businesses' income on their personal tax returns, is a sticky one for
Democrats.
Some, such as Sean Casten, the
Democrat facing Republican Rep. Peter Roskam in a suburban Chicago district,
have called to repeal the 20% deduction completely because of its complexity.
Others, like Katie Porter, the
Democratic nominee running against vulnerable Rep. Mimi Walters in Orange
County, Calif., are calling for legislation that would lower taxes even further
for small businesses.
The pass-through deduction was one of
the most hotly debated and rewritten provisions as the tax law moved through
Congress last year. Lawmakers struggled to find a balance between cutting taxes
for pass-throughs without effectively creating a new way to shelter income from
the Internal Revenue Service. Repealing the deduction without another plan to
reduce taxes for small business would likely be hard to accept for many
Democrats.
Undo SALT Limit
The tax law capped the amount of
state and local taxes an individual can write off at $10,000. The amount was
previously unlimited, and the cap hit residents of high-tax states in New York,
New Jersey and California particularly hard.
Repealing or increasing the cap on
that deduction is a high priority for Democrats who represent districts in
high-tax states, such as Reps. Bill Pascrell of New Jersey and John Larson of
Connecticut.
But outside the high-tax states,
there isn't much political pressure to change the deduction, which could cost
about $100 billion a year to restore in full, according to estimates from the
Joint Committee on Taxation.
There's also the argument that
undoing the limit would ultimately benefit top earners in high-tax states the
most.
"It could pick up some political
points but it's a revenue loser," Mr. Fichtner said. "From a
conservative standpoint, I would start to smile if the socialists were fighting
with the progressives who were fighting with the moderate Democrats."
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