By Naomi Jagoda - 01-04-16 06:00 AM EST
Liberals are working to keep their priorities front and center in the growing debate over tax reform.
While comprehensive tax reform will almost certainly not happen this year, both sides of the aisle think the undertaking could happen in 2017. And there is some talk, particularly in the House, of making international tax changes in 2016.
With the issue heating up, liberal Democrats are looking to go on offense by putting forward proposals and legislation that define their positions.
“One way to understand the debate next year is as a prelude for 2017,” said Harry Stein, director of fiscal policy at the Center for American Progress.
On the business side of the tax debate, liberal Democrats want corporations to pay more and stop “inverting,” or merging with foreign companies and reincorporating the combined company overseas to lower the tax burden.
When it comes to individual taxes, the left is keen to close “loopholes” for the wealthy and making tax changes that benefit the middle class.
Any action on tax reform in Congress is nearly certain to come from the House Ways and Means Committee, which has wide-ranging jurisdiction over tax policy.
Democrats on that committee are urging “our Republican colleagues to work with Democrats to reform the tax code in a way that protects working families, encourages economic growth and job creation, and is fiscally responsible,” a spokesman for the group said.
House Democratic Caucus Chairman Xavier Becerra (Calif.), who is also a member of the Congressional Progressive Caucus, told The Hill that while Congress “should be trying to make the code fairer, simpler and more competitive,” tax reform shouldn’t be a pretext to giving special treatment to small groups.
“My sense is the special interests are winning on tax policy,” said Becerra, who voted against a $622 billion tax bill that passed in December. He warned against lowering tax rates — a key goal for Republicans — without taking actions to close tax loopholes and help the middle class.
Democratic strategist Brad Bannon said that Democrats have typically been on the defensive when it comes to taxes.
“The Republicans have really dominated the tenor of the debate” and painted Democrats as people who want to raise taxes and spending, he said.
But since concerns about deficits have subsided, now is a good time for Democrats to focus more on tax fairness, Bannon said.
“Democrats are going to start to be more aggressive if they haven’t already been,” he said.
Traditionally, tax reform involves paring down the number of tax breaks and deductions and using the savings to lower tax rates. The last successful attempt to streamline the tax code in this way occurred in 1986, during the Reagan administration.
But what the parties will be battling over is whether the central goals of tax reform should be lowering rates and making America more competitive, or boosting revenue and easing the burden on families.
“It’s a mistake to let the debate become about how to lower taxes for corporations and rich people,” Stein said.
The White House, Republicans and some Democrats agree that corporate tax reform be revenue neutral, meaning it would not lower or increase the amount of money coming into the government.
There is also bipartisan support for allowing companies to repatriate revenues held overseas at a rate that is lower than the 35% corporate tax rate.
But many liberals disagree on both points.
The Congressional Progressive Caucus wants tax reform to lead to an increase in tax revenue from corporations and opposes a move to a “territorial” system that would exempt business’ offshore profits from U.S. taxes.
A Democratic aide close to the caucus said the group’s priority isn’t creating a more “competitive” international tax system, but rather helping working-class Americans.
Already, some liberal members of Congress have started touting that message.
In November, Sen. Elizabeth Warren (D-Mass.) laid out principles for corporate tax reform that included increasing the share of revenues paid by corporations, leveling the playing field between small and big businesses and promoting investment in the U.S.
Frank Clemente, executive director of Americans for Tax Fairness, said his group plans to try to push for legislation that would halt inversions. This issue has been a particularly hot topic recently because U.S. pharmaceutical giant Pfizer announced plans to merge with Ireland-based Allergan in what would be the largest inversion to date.
“A key theme for us is pay what you owe,” Clemente said.
One individual tax break that is particularly despised by liberals, as well as some Republicans, is for “carried interest,” or the profits interest that investment fund managers take for providing the service of managing the fund. Carried interest is taxed as captital gains, rather than ordinary income, allowing financial executives to pay taxes at a significantly lower rate.
Others issues on the table for tax reform are treating investment income more like other income and further expanding the earned income tax credit and the child tax credit.
The leading contenders for the Democratic presidential nomination, Hillary Clinton and Bernie Sanders, have embraced many of the tax reform ideas favored by liberals.
“[Clinton] has, in my opinion, done everything she can to satisfy the left wing of the party,” Bannon said.
Becerra praised Clinton and Sanders for releasing proposals that “put the whole issue of tax policy in context” and do not focus only on businesses, the wealthy or low-income individuals.
“I think you have to focus on the middle,” he said.
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