Posted by Sung Yoo - On Sept. 14th, the U.S. Senate Committee on Finance held a hearing regarding tax rates on high-income earners, capital gains and dividends. Although Democrats and Republicans appeared to agree tax reform is an important puzzle in fixing the struggling economy and high unemployment, they expressed deep philosophical differences on how to move forward.
Chairman Max Baucus (D-Mont.) said there was only one common-sense solution to the problem: Allow lower tax rates for the wealthiest Americans to expire, rather than making major cuts to Social Security or Medicare. Cutting Social Security or Medicare would only harm veterans, senior citizens and middle class families, Baucus added.
“Over the past three decades, the incomes of the richest one percent of Americans have risen much more rapidly than the other 99 percent of Americans,” Baucus said. “During that time period, the after-tax incomes of the top-fifth of taxpayers grew nearly eight times faster than those of the bottom fifth.”
Baucus proposed enacting legislation he introduced last year, which would let the current top two tax rates expire and return to 36 and 39.6 percent from 33 and 35 percent, respectively. Individuals with incomes more than 200,000 and married couples with incomes above 250,000 are in the top two tax tier.
Capital gains and dividend tax rates must be reformed as well, Baucus said.
“Capital gains and dividends are generally taxed at a rate 20 percentage points below the top income tax rate that high-income workers pay on their wages, and earnings from capital gains and dividends constitute a larger share of income for high-income taxpayers than for most Americans,” Baucus said. “Low capital gains and dividend rates helped these extremely wealthy tax payers pay an average tax rate of 17 percent, a rate far lower than many middle-class families pay.”
Ranking Member Orrin Hatch (R-Utah) accused Democrats of being “tax-and-spend liberals” who are out of touch with the views of most Americans, and added Democrats are using terms like “balanced approach” and “revenues on the table” as euphemisms for higher taxes.
“Even if all of the Bush and Obama-era tax rates are extended permanently, revenues as a percentage of gross domestic product will be 18.4 percent according to the nonpartisan Congressional Budget Office,” Hatch said. “If taxes are already heading higher than they have been historically, should we raise them even more? From my perspective, the answer is a resounding no.”
Hatch also argued that the tax rates necessary to pay for the level of government spending the President and most Congressional Democrats want would affect more than just the top two tiers, calling more revenues a mere "band aid."
The witness’ offered different takes on how to tackle the issue.
Dennis Mehiel, a board chairman of U.S. Corrugulated, Inc, said contrary to Republican claims, his small business continued to grow despite tax rate increases in 1994 and 2002. Meanwhile, Stephen J. Entin of the Institute for Research on the Economics of Taxations said higher marginal tax rates on any group would reduce GDP and income across the board, not just for those paying the initial tax bill. Leonard E. Burman, a professor at Syracuse University, suggested keeping top rates relatively low while closing loopholes and taxing capital gains at the same rate as other income may be a more efficient option.
The NASE’s position on fairness in tax compliance can be found here.
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