Proposed tax on wealthy breaks with traditional party line
BY CHERYL SLAVIN
A recent Tax Code reform proposal by Republican Chairman of the House Ways and Means Committee David Camp has broken the recent mold of the Republican Party and revealed ideological fissures within the party.
Camp has not kept secret his long held desire to completely overhaul the Federal Tax Code. The press release introducing the draft “Tax Reform Act of 2014” states that its purpose is to “fix America’s broken tax code by lowering taxes while making the code simpler and fairer for families and job creators, without increasing the budget deficit.” Camp proposes, among other things, to change the sliding scale of tax brackets into three set rates of 10, 25 or 35 percent, to increase the standard deduction for individual taxpayers, to increase the child tax credit for most while reducing it for those in the wealthier bracket and to eliminate the alternative minimum tax.
But, to balance out these reforms, he also proposes to levy a new tax of .035 percent on financial institutions designated by federal regulators as “systematically important financial institutions (SIFIs),” close the “carried interest” tax loophole which permitted hedge fund and private equity managers’ share of investment profits to be taxed as capital gains rather than as wage income, eliminate the individual deduction for state and local taxes, cut in half the size of the home mortgage interest deduction, and tax the earnings of self-employed workers (including doctors, lawyers and business owners) as business income rather than as wages.
While most politicians and pundits on both sides of the aisle believe that this particular legislation will never see the light of day, the very fact that a leading Republican is willing to consider targeting wealthy financial institutions and private equity or hedge fund firms as “a fresh source of revenue” indicates that lawmakers would be much more willing to seriously revisit these ideas in the future.
Almost immediately after the proposed legislation came out, Republicans began to distance themselves, referring to it as “Camp’s draft,” rather than as a Republican initiative. A few, like Camp’s fellow Michigan Representative Candice Miller, came out in support of the changes. The vast majority, however, have expressed that at the very least this legislation would not even come to a debate until after the November elections, and that more likely it would never even come that far.
Republicans are uncomfortable with what appear to be such “populist” reforms, more likely to come out of the Democratic camp than theirs. In a rare public display of inner friction, they have openly expressed concern that taxing the wealthiest, especially the banks, would end up highly detrimental to lending and capital formation, that doing so singled out “one segment of the industry for punishment,” and that in the end the reforms would only cost taxpayers more. Tellingly, the Republican House leadership has not yet weighed in directly on the proposals.
The schism reveals the existence of at least some Republicans who, especially after the recent bailouts, have “cooled to the financial sector, fed up with banks’ incessant desire for government help.” Wall Street is not the darling of Washington anymore.
Interestingly, even Democrats have their reservations. New York Senator Chuck Schumer is against the plan, calling the elimination of state and local tax deduction a “deal breaker.” Others recognize that a tax on bank assets is really a tax on lending, and that consumers would end up footing the bill when the lending institutions raise their rates. The Democratic leadership has been having difficulty finding a Democratic co-sponsor in the House.
Moreover, according to crainsnewyork.com, a political shift away from Wall Street would disproportionately impact what are traditionally blue states, especially New York. For instance, sevevn of the 10 “SIFIs,” whose over $500 billion in assets qualifies them for the .035 percent tax, make New York City their home. New York is also one of the main financial hubs both nationally and internationally, which means a greater proportion of equity and hedge fund firms affected by the loss of “carried interest.”
Plus, under the proposed reforms, all multinational companies would be taxed on income from patents held abroad, a provision particularly harsh for pharmaceutical companies such as Rockland’s own Pfizer.
Overall, it doesn’t look like this proposal is going anywhere soon. What Camp has done, however, is awakened the sleeping giant and made it possible for Republicans to consider options which may prove popular with lower and middle-income voters, while rankling the party’s base in the big business sector. That a Republican leader has introduced the concept of targeting the wealthiest for tax revenue has the effect of legitimizing that idea at least for future consideration, if not eventual passage.