There’s a right way — and a wrong way — for Democrats to reform the tax code

No winners in a race to the bottom

Over the last few weeks, there has been a constructive debate over tax reform proposals from Senators Cory Booker and Chris Van Hollen. In each of their proposals, new taxes are proposed on wealthy Americans to pay for tax cuts aimed at a large swath of households.

Searchlight has taken issue with these proposals because of the design of the most prominent tax cut laid out in each. Rather than use the tax code as a mechanism for advancing distinct goals — such as offsetting the cost of raising a child or incentivizing work — the proposals primarily treat federal taxes themselves as the problem. Long-term liberal priorities are, at best, ancillary.

When in power, liberals can — and should — pass tax cuts that send most or all of their benefits to low-income households and the middle class. But lawmakers also need to set priorities: fiscal space and political capital are limited, and we need to spend wisely.

Our view is that impactful tax reforms should be prioritized, while leaving sufficient fiscal space for program expansions and modernization. This means avoiding the blunted tax exemptions found in the recent proposals.

More specifically, there are three critiques of the Booker and Van Hollen proposals that should be weighed for any landmark spending bill being designed by liberal lawmakers:

1. A multi-trillion dollar tax cut (as is the case with the Booker proposal) that directs a sizable portion of the benefit to the wealthy is not the best use of the available fiscal space. There’s a lot of room between sensible tax cuts that help working class Americans and the reforms presented by Senator Booker. Instead, lawmakers should follow the Obama/Clinton model that focused on Child Tax Credit (CTC) and Earned Income Tax Credit (EITC) reforms.

2. Democratic lawmakers should not engage in a race to the bottom on taxes. Such short-term thinking risks long-term legislative priorities. Federal taxes are not the main problem facing Americans — but they can and should be used as a vehicle to help address the distinct issues facing American families, such as the cost of raising children.

3. If a trillion plus dollars are raised via new taxes on the wealthy, such as the projected $1.5 trillion collected via millionaire surtax in the Van Hollen bill, a portion but not all of the new revenue should go towards middle class tax cuts. Fiscal space must remain to enact other critical agenda items — tangible program expansions — that help bring down Americans’ health care costs, secure workers better jobs, and grow the overall economy.

These guidelines can be applied directly to the Booker proposal to demonstrate a potential path forward.

The costly standard deduction expansion of the Booker plan — estimated to cost over $5 trillion — took attention away from the less costly but valuable reforms included in his bill. Senator Booker proposes notable expansions to the Child Tax Credit and EITC, while also including a new “baby bonus” available to American families in the first year of a child’s life. If the standard deduction provision(s) were dropped, the bill goes from adding significantly to the federal deficit to near neutral or even reducing the deficit.

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A new direction

The reform conversation should shift: we should make that set of provisions the approximate upper-end in cost of tax reforms, while weighing smaller fiscal versions that supply tax cuts to American families while leaving fiscal space for other Democratic priorities.

Here are three package options as examples, with cost estimates and average gains for each income decile kindly calculated by the team at PolicyEngine. (The data can be found here.)

Option A maintains all the spending provisions in Senator Booker’s bill minus the standard deduction reforms. These include making the Child Tax Credit fully available to low-income families, shifting the CTC credit size to $4,320 for parents of young children and $3,600 for older children, and adding a “baby bonus” amount in the year of a child’s birth.

Meanwhile, the EITC for childless workers would be increased in size while expanding the number of workers eligible for the credit. (We also asked PolicyEngine to include a modest reform — increasing the income level for married couples filing jointly where the credit begins to phase out — to address a marriage penalty in the childless EITC.) Since this option would still dedicate fully $1.7 trillion of fiscal space to a tax cut, it would crowd out other impactful and popular options to make life more affordable for working Americans, and we would therefore recommend against it.

Options B and C are more preferable if policymakers want to enact robust expansions in other areas. The main differences from Option A is that the size(s) of the Child Tax Credit and associated “baby bonus” are smaller. (The EITC reforms in Option A are maintained). As you can see, the price tag drops substantially. Option B and C are $500 billion and $700 billion cheaper than Option A, respectively, while maintaining similar child poverty reductions per PolicyEngine’s estimates.

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We can debate which new taxes on the wealthy are best — Booker and Van Hollen each propose one — and which specific CTC and EITC reforms are worth including in a reform package.

The point here is that liberals and lawmakers should treat this as an exercise on what they want their priorities to be with a set amount of funding. If $1.5 trillion in new revenue is raised, Options B and C provide flexibility to pursue other reforms while being capable of reducing the deficit.

The next time liberals are in power, there may only be one opportunity to enact a robust reform package. Tax cuts should be part of those discussions, but the reforms should be approached in ways that have worked for past presidents (i.e., CTC, EITC) while ensuring there is enough available funding to improve program performance and offerings in other priority areas.