Senate Democrats today reached out, after a fashion, to their Republican colleagues over tax reform. They said they’d be willing to work on bipartisan legislation under three conditions: It should be written through the regular committee process, it should cut taxes for middle-income households without reducing taxes for those with high-incomes, and any tax legislation should raise at least as much revenue as the current code.
While the letter was ostensibly an olive branch, it showed just how far apart the two parties are when it comes to taxes. Republicans have a very different tax bill in mind, both in terms of process and substance. The Democrats’ letter was organized by Minority Leader Chuck Schumer (D-NY) and top Finance Committee Democrat Ron Wyden (D-OR) and signed by 45 of the party’s 48 senators. Only senators Joe Manchin of West Virginia, Heidi Heitkamp of North Dakota and Joe Donnelly of Indiana—all running for reelection in red states-- did not sign.
Let’s start with process. Democrats want a bipartisan bill written through the committee process. So far, at least, the GOP does not. For weeks, four senior Capitol Hill Republicans and two top Trump Administration aides have been writing a tax bill behind closed doors with the goal of delivering a mostly-finished bill to Congress in September. In addition, the president and the GOP congressional leadership still hope to pass a bill through the budget reconciliation process that would require only 50 Senate votes, the same process they tried to use in their so-far unsuccessful effort to replace the Affordable Care Act.
As far as substance, the Democratic vision of the distribution of tax cuts is vastly different from what Republicans have proposed so far. President Trump’s April tax outline, as well as his various campaign tax plans, would cut taxes for nearly everyone, including middle-income households. But his ideas would cut taxes far more for those with the highest-incomes. The Tax Policy Center estimates that the highest income 1 percent would enjoy about 40 percent of the benefits of a tax plan consistent with the President’s April outline. If revenue-raisers suggested by the president were added to the mix, the top 1 percent would get half the benefits.
The tax blueprint released in June, 2016 by the House Republican leadership followed much the same path—tax cuts for nearly all but largely aimed at the highest income households. TPC estimates that three quarters of the tax cuts in the House GOP leadership plan would go to the highest income 1 percent of households in 2017, (those making $700,000 or more). About 3 percent would go to middle-income households (those making between $48,000 and $83,000).
Finally, there is the matter of revenue neutrality. Senate Democrats reject any bill that cuts taxes. Republicans have yet to settle on their own approach. Some, such as House Speaker Paul Ryan (R-WI), insist their aim is a bill that does not add to the national debt. The president and his team have promised both the biggest tax cut in history and a balanced budget by 2027.
Even if Republicans were so inclined, adjusting either of these ideas to meet the Democrats’ preconditions would require far more than tinkering. The very design of the two plans leads to changes that are highly regressive and very expensive.
For example, big across-the-board individual income tax rate cuts provide outsized benefits to high-income taxpayers. Similarly, a key element of Trump’s agenda would cut the tax rate on pass-through businesses such as partnerships from 39.6 percent to 15 percent. While most pass-throughs are owned by people with relatively little business income, most of the money these businesses generate is produced by a relatively small number of very wealthy taxpayers. Half the tax benefit would go to those in the top tax bracket, who would get a rate cut on their business income of more than 60 percent.
In theory, Republicans and Democrats could look for a middle-ground. But the gap between them is so large that one, or both, would have to abandon key principles to reach a deal.
