A very intriguing development today as the Center for American Progress rolls out a $1.8 trillion comprehensive tax reform plan that sets a new bar for Democratic Party thinking on the subject. CAP’s thinking rarely strays far from where the Obama administration would like the national conversation to go. This report, however, lands with unusually impressive force in terms of its byline. The names on the document include not just CAP’s econ/tax/budget team of Michael Ettlinger, Seth Hanlon, and Michael Lindon but also CEO Neera Tanden, CAP founder and former chief of staff John Podesta, plus Roger Altman, William Daley, Robert Rubin, Leslie Samuels, Lawrence Summers, and Antonio Weiss.
That’s basically the whole center-left establishment calling for a big tax hike. I’ll delve into the details of the proposal, but the basic idea seems to be this. The White House has revenue proposals that will raise $1.2 trillion very progressively. Alan Simpson and Erskine Bowles have a tax proposal that actually raises more revenue—$1.8 trillion—but does so in a less progressive way. The CAP report shows a way to reach the Simpson-Bowles revenue targets with an Obama-esque level of progressivity.
The key elements:
— Higher marginal taxes on the rich and a more generous interpretation of who counts as rich: CAP would impose a top marginal income tax rate of 39.6 percent but would have that bracket start at $422,000 which is slightly higher than the current law threshhold.*
— Higher taxes on investment income: Put the top capital gains tax rate up to 28 percent and treat dividends as ordinary income (i.e., excluded from the payroll tax but not given any further tax preferences over that large preference). They also want to tighten rules around tax-preferred retirement plans and to raise $12 billion.
— Replace deductions with 18 percent credits: Itemized tax deductions would be replaced with 18 percent tax credits (i.e. the deductions are still in place but are less valuable) with the charitable deduction granted a more generous 28 percent credit.
— Partial phase-out of health care exclusion: Right now if your boss pays you cash money you pay taxes on it, but if he pays you in health insurance premiums you pay no taxes. That’s a boon to people who pay high tax rates. CAP will make it less boony by limiting the exclusion to the 28 percent rate level.
— Stabilize the estate tax: They call for a $2 million per person estate tax exemption with rates that rise up to 48 percent, and endorse some Obama administration proposals to tighten loopholes in the estate and gift tax.
— Hit Wall Street: They call for closing the “carried interest” loophole that lets hedge fund managers pretend their labor income is investment income, as well as an S Corporate dodge that’s used to avoid Medicare taxes.
— Excise tax grab-bag: They want a 50 percent hike in the cigarette tax, a uniform $16 per proof gallon alcohol tax, and a “small fees on internet gambling.”
— Revenue-positive corporate income tax reform: They call for base-broadening, rate-lowering corporate income tax reform designed to raise revenues by four percent.
— Some tax cuts: They replace the dependent exemption with a refundable child tax credit of $1,600 (Ross Douthat should cheer), permanently extend EITC enhancements (huge win for the working poor), eliminate the Alternative Minimum Tax and the PEP and Pease phaseouts, and permanently extend the R&E tax credit and green energy production tax credits.
The writer in me thinks that if you’re going to do a big picture tax reform you ought to do something even more radical that can be explained more concisely but these are all fairly sound ideas except that I don’t know why they want to tax capital gains and dividends differently. In political terms, I’d also say that part of the significance here is that it shows the extent to which tensions between the Robert Rubin wing of the Democratic Party (well-represented on this list of signatories) and the labor-liberal wing has waned away on tax and budget issues. You could obviously design a more left-wing plan than this if you wanted to, but the general trajectory of the plan—soaking the rich, including by going after their investment income—does not reveal much sensitivity to the concerns of Wall Street or corporate executives.
In sum this is a very progressive re-shaping of the tax code. Relative to current policy, households with under $100,000 in income would generally see their taxes cut, households in the $100,000-$250,000 range will be about neutral on average with a fair amount of variation according to the specific situation, and that will all be fully offset plus $1.8 trillion by higher end taxes.
* The original version of this article wrongly said that some commonly discussed proposals would start the top bracket at $250,000.
