Rep. Chris Van Hollen’s Bold Attack on Inequality

January 13th, 2015 at 10:27 am

One of the things I talk a lot about on these pages is the need for policy to reconnect economic growth to middle-class prosperity. There are a number of policy approaches to attacking that fundamental problem of the US economy. I’ve often stressed full employment as a solution, a goal that should appeal to people of any political stripe or sensibility, since it’s about efficiently utilizing our resources (though we can certainly argue about how you get there). Others have stressed, and I strongly agree with them, the need for greater union power to enforce a more equitable distribution of growth.

Rep. Chris Van Hollen has just introduced another approach, a bold, far-reaching one that goes directly at the problem by providing a significant tax credit to middle and upper-middle-class families, along with a spate of other benefits, paid for largely by taxing those at the top of the income scale. If what we’re seeking is the policy glue that will reconnect growth and broad prosperity—and that’s exactly what we should be looking for—then Rep. Van Hollen just offered up a potent tube of economic epoxy.

All told, the plan raises $1.2 trillion over ten years and uses it to:

–Boost paychecks with a tax credit worth $1,000 per year for each worker, so $2,000 for working couples. The credit is targeted directly at the middle class—it’s non-refundable, so it doesn’t reach low earners, though Rep Van Hollen said he’s looking for ways to make it at least partially refundable. It phases out at $100,000 per person or $200,000 per couple.

–Provide a savers bonus of $250 to those who save at least $500 of their tax credit or their EITC.

–Provide a tax benefit to employers that establish apprenticeship/”earn-while-you-learn” programs.

–Significantly increase child care assistance to working families.

–Increase the tax deduction for second earners (under the current system, a second earner’s paycheck is taxed at the top rate of the primary earner; the plan includes a 20% deduction for second earners with kids on up to $60,000 of their earnings).

The slide below shows Van Hollen’s estimate of how much the plan would return to a dual-earner family with a kid in child care, compared to the impact of the tax plan in recent Republican budgets. BTW, note the income level of the family in question: $80,000. In other words, he’s definitely targeting the middle class as opposed to the poor, though to be fair, the main Congressional Democrats’ budget proposal has numerous important anti-poverty provisions. Van Hollen has emphasized that this plan should be seen as building on top of their budget.

cvh_plan_slide

Source.

The proposal is revenue neutral. The main offsets are a 0.1% (10 basis points; that’s $5 on a $5,000 trade) tax on financial transactions (stocks, bonds, derivatives) and (as I read it) the targeted closing of some of the tax breaks that benefit the top 1% (tax expenditures like the mortgage interest deduction or the favorable tax treatment of unearned income). The plan notes that the FTT would ideally be phased in along with a similar measure proposed in the European Union. Such coordination is designed to reduce concerns about the ability of investors to avoid the tax by seeking offshore exchanges.

Another potential revenue raiser would disallow corporations from deducting bonuses above $1 million if they’re cutting the jobs and pay of their workforce. Note that the plan doesn’t restrict “performance pay” above $1 million. It just says you can’t deduct it from your taxes unless you’re also providing raises to employees (or more directly sharing profits).

On the structure of the plan, as noted, Rep. VH is looking into ways to make the tax credit at least partially refundable; for example, by allowing the credit to phase in at the first dollar of earnings for all workers (below the caps), even those without federal tax liabilities. That raises the price tag, but it also means it reaches lower earners who clearly need the help. In that regard, the VH team can also point to the D’s budget, which makes permanent key anti-poverty improvements to the EITC and Child Tax Credit that are scheduled to expire in 2017.

You will not be surprised that the Republican majority has yet to embrace Rep. Van Hollen’s plan. Chris, if you’re waiting by the phone for Leader Boehner’s call, I’d say feel free to go get lunch.

But that’s not the point. If the criterion for acceptance of a policy idea is that “House R’s will support it,” then we can all close up shop for now. To the contrary, this kind of expansive thinking is exactly what members should be engaged in. Whether you like CVH’s approach here in attacking inequality through the tax code or favor ideas that target market outcomes, what’s so very notable here is that a senior member of the Democrat’s caucus is trying to do something about the relentless inequality that’s beset the middle class and poor for decades.

He’s demonstrably not saying, “well, now that we’ve got decent growth in the macro-economy, we’re done. Let’s go fundraise!” He’s saying growth is necessary but it’s not sufficient to reach the folks for whom GDP growth is something that shows up in the business press, not in their paychecks. Policy makers must therefore craft policies that will go right at this growth/prosperity divide. That’s what Van Hollen has done here and I say: you go, man!

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12 comments in reply to "Rep. Chris Van Hollen’s Bold Attack on Inequality"

  1. Steve Ellerson says:

    Taxing financial transactions within tax free Roth IRAs, IRAs, 401Ks, and Roth 401Ks is sooooo wrong. These accounts help people save for retirement. Now you want to start taxing them? Why even open the door to that? People with those accounts are not financial professionals at banks, they are middle class people trying to save money for when they retire. Why are you supporting the initiation of taxes on those accounts? That is so wrong.


  2. Larry Signor says:

    Steve, IRAs and 401k’s should not be frequent traders so an FTT will have a minimal impact on these accounts (If your IRA or 401k manager is a frequent trader, your accounts are probably under-performing by 7-8% annually). An FTT would discourage mini-arbitrage trades which add no value (if high speed traders wanted to play with the big boys, they would be in the currency market, not taking advantage of wealth investors).


    • Steve Ellerson says:

      Why should a tax be imposed AT ALL on making a financial transaction within an IRA account? It is ludicrous. They are tax free accounts. And YES I *am* a democrat. And YES I *am* middle class. And *NO* I am not a wall street trader. Dont you understand that IRA accounts have nothing to do with speculation? They are TAX FREE and TAX DEFERRED accounts depending on Roth IRAa or non-Roth IRAs, for MIDDLE CLASS WORKERS!


      • John says:

        Steve, Consider a balanced view. 1) The cost of the transaction tax to middle class savers would likely be very small, possibly negative (it might actually add to their accounts because traders – who charge per transaction for transactions which often do little or nothing to benefit account holders – would trade less):

        http://www.cepr.net/index.php/blogs/beat-the-press/the-cost-to-savers-of-the-democrats-wall-street-sales-tax

        And 2) The proceeds from the tax would provide real, substantial benefits to middle class families, as outlined in Jared Bernstein’s post.

        Bottom line: Wall Street traders – who can well afford to – would lose a bit of revenue. Middle class savers would receive a very significant financial benefit, way more than they might (or might not) get without the tax.


      • Rich C says:

        Steve,

        For one thing, as noted in a reply above, its a tax on transactions. If you are managing a retirement account sensibly, you would not be incurring much of any such tax liability even in a non-tax-preferred account. Second, traditional IRAs are tax deferred, so presumably the FTT tax would be deferred along with taxes on dividends and capital gains. Why its unfair to middle class savers to tax dividends and capital gains, but not transactions escapes me. Especially considering that the proposed FTT rate is something like two orders of magnitude smaller than the dividend and capital gains rates. Third, the vast majority of the benefits enjoyed by IRA holders go to households at the top of the income distribution. While contributions to IRAs (and 401ks) are capped, those caps are high compared to the annual incomes of middle-earners (few working people can max out their allowed contributions). Moreover, as Mitt Romney demonstrated, high income people have a variety of tricks at their disposal to get around those caps and protect very large dividend and capital gains income from taxation, so frankly I’d support abolishing these vehicles and using the savings to increase Social Security benefits. But whatever you think of that, your outrage at the proposed FTT seems wildly overblown, and that’s without even considering that the proceeds from the tax get transferred back to middle income earners!


  3. Tyler says:

    Don’t the Republicans hate tax increases, and don’t they control both houses of Congress?


  4. Fred Donaldson says:

    Unfortunately, this plan does nothing to help senior couples, with jobs, who may not yet be on Social Security, but are not allowed to claim the Earned Income Tax Credit if they have reached the age of 65. Even if everything is the same – same job, same waiting until 66 for Social Security benefits, same everything in your life, by the simple act of exceeding age 65 you lose this benefit. The Hollen proposal will most likely just extend this inequity to yet another benefit for everyone except seniors. This will rank with the Affordable Care Act’s ignorance of the elderly, where you cannot get a subsidized program on the new exchange if you are 65 or older, even though the benefits are better and the premiums lower.


    • Anonne says:

      The ACA stops at 65 because they get Medicare, which has its own scheme of payments and low cost plans. The ACA doesn’t ignore the elderly. It is not designed to replace Medicare. For that, you have Medicare Advantage plans.


  5. Larry Signor says:

    Tyler, The GOP has a majority in the Senate and the House, but they do not control them any more than the D’s were able to. Control is a fiction, gridlock is the reality.


  6. Jill SH says:

    Oh, thank goddess, someone is finally doing an aggressive offense (the best defense!) on taxing/funding.

    Guys, guys, this FTT is so tiny!! that it will have almost no effect on funding in IRA accounts. ( I just had to cash in some IRA funds and was hit by a fee of 4% from the financial firm.)

    It will be big enough to raise a sh*tload of money from the people who can most afford it. I’ve said all along: institute an FTT and offer corporate tax reform and see if there are any bites.

    And by the way, aren’t most of us used to paying a sales tax of 3-5-7-9% on clothes, electronics, or restaurant meals to our cash-strapped states? Here in NH we even have a sales tax on real estate transactions. Why NOT financial transactions?

    If you want to raise a good, stable amount of revenue, you need to go tax where the money is. Broadly and at a low rate. An FTT does this.


  7. Smith says:

    The plan reeks of Clintonomics, (actually Reaganomics), because it doesn’t address the fundamental problem with the economy, worsening inequality caused by stagnant wages. Instead it is progressive Republican light, with a dash of Tea Partyism thrown in. Lets cut taxes, and attack Wall Street (slightly). Lets do nothing for the poor, or working class who make up 1/3 of the population, or government programs that were slashed, but most of all, no government programs to increase demand and tighten labor market to boost wages. Little for Keynesians to get excited about.
    The good thing is that it paints Republicans into a corner.
    The bad thing is the the truly progressive programs it supplants, where middle and lower classes might find common cause, and the grand illusion of aiding the middle class with Reaganomics, tax cuts.
    When the family’s income stagnates a few years, they’ve already lost more than they gained from the tax cuts. Except for the upper 10%, the $100,000 to $200,000 family incomes, because their wages don’t stagnate nearly as much.
    Every debate on tax cuts takes away from debate on restoring labor, taxing the rich, implementing needed government aid to child care and education in the form of universal benefits instead of credits which benefit mostly the rich.


  8. Chuck Sheketoff says:

    Thanks for the post – I agree that its refreshing to see such a plan — too many Ds have been at best high on rhetoric but short on specific plans that they are willing to put their names on.


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