Tax code’s progressivity under scrutiny

Democrats and Republicans are debating whether an overhauled tax code should be as progressive as the current one, after the latest House GOP budget set up an aggressive framework for tax reform.

{mosads}Top Democrats are pushing to maintain the current progressivity in the code, after the party scored its long sought-after tax rate increase in the fiscal cliff deal.

But with the top individual tax rate now 39.6 percent, some Republicans aren’t nearly as concerned about progressivity as they look to lower tax rates and eliminate tax preferences.

“If this was easy, we’d have it done already,” said Rep. Pat Tiberi (R-Ohio), a senior House Ways and Means member. “There’s a lot of things that are at odds with each other.”

The battle over progressivity is just one of a slew of issue Republicans and Democrats are trying to wade through as they push toward tax reform.

The nonpartisan Urban-Brookings Tax Policy Center on Friday underscored the challenge Washington faces in that process, releasing an analysis showing that policymakers would need to find around $5.7 trillion in savings to offset the tax proposals in the latest House GOP budget.

In the newest Republican budget, Rep. Paul Ryan (R-Wis.) calls for collapsing the current seven tax brackets into just two individual tax rates – 10 percent and 25 percent.

House Republicans, in the proposals spearheaded by the tax writers at Ways and Means, are also pushing to reduce the top corporate rate to 25 percent, from 35 percent, and to eliminate the Alternative Minimum Tax.

The House GOP laid out a similar tax reform framework last year – though, after the fiscal cliff tax increases, they have now softened their language to call the 25 percent top rate a goal.

According to the Tax Policy Center, the rate cuts in the GOP plan would mostly help the highest earners. The center’s Howard Gleckman also cast doubt that Republicans could find enough revenue among tax preferences to pay for their proposals.

Even if they could, Gleckman added, Republicans would be hard-pressed to make the changes while keeping the code’s current progressivity.

Several of the bigger ticket tax incentives, like the deduction for home mortgage interest and the healthcare exclusion, broadly help the middle-class, Gleckman said. Other preferences, like the current rates for capital gains and dividends, are more geared toward the wealthy.

“That requires Republicans to make a really tough choice – do you really want to go after investment income?” Gleckman told The Hill.

Some top Republicans say that the economic benefits of tax reform would make up for any loss of progressivity in the system – especially given the fact that, as Rep. Kevin Brady (R-Texas) put it, the current code is “awfully progressive.”

“If the end result is more pro-growth for the economy, people have a better chance to get good paying jobs and to move up to middle class and beyond, then that ought to be our goal,” Brady said.

Republicans also say that other tax increases in the fiscal cliff deal and the new taxes to help pay for the Democratic healthcare law have put the top rate closer to 45 percent than 40 percent.

But on the other side of the aisle, Democrats point to the rise of income inequality as just one reason to keep the current progressivity in the code.

Senate Democrats this week also released a budget proposal that called for almost $1 trillion more in revenue from wealthy individuals and corporations – part of what Democrats call a “balanced” approach to deficit reduction.

“They seem to be blind to what’s been happening,” Rep. Sandy Levin (Mich.), the top Democrat at Ways and Means, said about the Republican proposals. “It’s kind of blind ideology.”

With control of Washington currently split, Gleckman said he was hard-pressed to see how Democrats would agree to a tax reform that made the code less progressive.

But Tiberi said it was just one of a slew of problems to stare down, as Ways and Means looks to pass a tax reform plan this year.

Ways and Means members are currently meeting in 11 separate working groups to discuss tax reform, while their counterparts at the Senate Finance Committee are also poised to start bipartisan meetings of their own.

“There’s a lot of different issues at play,” Tiberi said. “We have to thread the needle.”