Senators Debate How to Get to ‘Fair’ Taxation

At a September 12 hearing previewing next year’s tax reform debate, Senate Finance Committee Chair Ron Wyden (D-OR) suggested that those “at the very top” should be taxed on “the income they actually enjoy.” Meanwhile, other lawmakers called for Tax Code simplicity — including taxing different types of income similarly.

Just before the hearing, the Joint Committee on Taxation (JCT) released a report analyzing U.S. taxation of the ultra-wealthy. The JCT’s report notes that a “salient question” is “the degree to which the U.S. tax system should impose taxes according to a taxpayer’s ability to pay” — the correct level of Tax Code “progressivity.”

Several lawmakers zeroed in on one figure in the JCT’s report — that the top 0.01% had an average federal tax rate of 34% in 2019 — a year when the Tax Cuts and Jobs Act (TCJA, P.L. 115-97) tax reforms were effect. That contrasted with the average 6.8% rate for the bottom 50% of taxpayers.

Wyden contested the JCT’s 34% rate calculation, calling it “funny math.” According to Wyden, the figure ignores what he says is a common practice amongst the ultra-wealthy — “buy-borrow-die” — where a taxpayer acquires valuable assets, “watches them appreciate,” and “borrows against that value to generate cash.” He called this practice a “kind of tax trickery” that those with more modest incomes cannot use.

Senator James Lankford (R-OK) said that what’s left out of the JCT’s report is the conversation about whether to tax the ultra-wealthy on their unearned income. So the real conversation to have, said Lankford, is “are we going to do an income tax” or “are we going to do a tax that’s not really an income tax, that’s a tax on what you actually just have.”

Hearing witness Indivar Dutta-Gupta, a fellow at Georgetown University’s McCourt School of Public Policy and the Roosevelt Institute, said the Tax Code has contributed to wealth inequality by “favoring income from wealth over income from work.” In his written testimony, he explains that high-wealth taxpayers “respond strongly” to the way the Tax Code is constructed — including by “holding untaxed wealth that may be more economically productive if sold or exchanged.”

Witness Bob Lord, a senior advisor at Patriotic Millionaires and former tax attorney, also talked about what he called “design flaws in the tax system” that allow the ultra-rich to avoid taxes. But the “most fundamental” issue, said Lord, is that the Tax Code “lacks a reliable, working mechanism to limit wealth concentration.” The ultra-wealthy have developed strategies to evade taxes on intergenerational transfers of wealth — namely, estate, gift, and generation-skipping taxes, explains Lord. He suggests another mechanism is needed to truly tackle wealth inequality — “a tax on true economic income or a tax on extreme wealth.”

Small business impacts.

But Senator John Barrasso (R-WY) contended that Democrats’ proposals for what he called a “new supercharged death tax,” an increase in capital gains rates, and a 5% surtax on small business income would “strangle small businesses.”

National Federation of Independent Business’ Jeff Brabant agreed, explaining that by getting rid of stepped-up basis and increasing the death tax, it becomes “a little bit of a double death tax.” These increases also mean that instead of small businesses passing to the next generation after an owner’s death, they may be sold to “larger businesses who don’t have the same footprint” in “small, rural communities,” explained Brabant.

Calls for simplicity.

Another recurring theme during the hearing was whether a simpler, more “neutral” Tax Code is a worthy goal. Ranking member Mike Crapo (R-ID) said the current tax system is “so complex” and lauded TCJA provisions “fixing” the standard deduction and making it more widely available, as well as those “dealing with the alternative minimum tax.”

Tax Foundation President Daniel Bunn agreed, noting the high compliance costs of a complex tax system. In addition, contended Bunn, those in Washington should not use the Tax Code to micromanage taxpayers’ decisions on everything from child care, to housing, to green energy.

Senator Ron Johnson (R-WI) called the Tax Code “a grotesque and complex monstrosity,” suggesting that if we were to simplify it “we could fix an awful lot.” Johnson even went as far as to suggest that the Tax Code “treat the 5% of American businesses that are C-corps like we do the 95% of other businesses, and tax the business income every year at the ownership level.”

Johnson said “it’s bizarre that we have different levels of taxation for different types of income” because “income is income.”