Quick. Can you name one thing in the existing tax code that actually does produce wealth? Now move up to five. And that’s just Republicans.
A Democratic Congress could rewrite the tax code more quickly than any of its Republican predecessors since the Bill Clinton era. After Tuesday night’s midterm elections, the Democratic majority is likely to be larger than it’s been in years. Democrats will have more than 60 votes in the Senate — five more than they would need to secure a filibuster-proof 60 votes. They also have a stronger position in the House, thanks to losing only 10 seats. For a spell after that, they could choose whether to strike at the tax code as badly as they feel like, or hold off and hope for tax reform that provides for even more government spending.
There’s already quite a bit of talk within the Democratic caucus about tax reform. Senator Bob Casey, a Pennsylvania Democrat who is up for reelection next year, said on “Morning Joe” this week that he believes a tax bill would “solve the biggest problem” facing the country, jobs.
Senator Chris Van Hollen of Maryland, a Democrat and the ranking member of the Senate Budget Committee, said the current system is “a lot worse for working families” than other industrialized countries.
Why? “First and foremost,” Mr. Van Hollen said, “it is riddled with distortions. It is riddled with special-interest giveaways, and it is riddled with loopholes for the wealthy and the well-connected.”
House Democrats who have already launched a discussion about their tax priorities say they would like to raise taxes on the wealthy and close the carried-interest loophole, which allows individual income managers in private equity and hedge funds to reap huge investment and management fees that are taxed as capital gains and not ordinary income. The current top tax rate on capital gains is currently 20 percent.
More recently, Senator Catherine Cortez Masto of Nevada, a newly elected member of the Senate, has started a similar discussion. She said in an interview, “We definitely need to think about whether we’re penalizing people for the risk that they take, whether we are encouraging success through the rules that we put in place.”
Mr. Van Hollen said he would also like to raise taxes on the wealthy. “There may be some opportunities there that make sense, like removing the carried-interest deduction and taxing carried interest at ordinary income,” he said.
But there are big differences. Senator Cory Booker of New Jersey has written proposals for tax hikes for wealthy individuals that go beyond Mr. Booker and Mr. Casey’s calls for taxing carried interest. Senator Sherrod Brown of Ohio wants an overhaul that ensures tax rates only increase at the very top of the income range. Senator Jack Reed of Rhode Island would raise taxes on wealthy investors while eliminating exemptions for “carried interest.” Representative Bill Pascrell of New Jersey wants a tax reform that would be fairer by closing loopholes and getting rid of exclusions, but which also raises taxes on the rich. Representative Ron Kind of Wisconsin wants to stop making wealthy individuals richer while raising taxes on the rich, as does Senator Jeff Merkley of Oregon.
And speaking of taxes on the rich, Senator Bernie Sanders of Vermont has already made his pitch for higher rates. Mr. Sanders wants to shift the tax code to a higher progressive rate structure by reducing the number of tax rates, boosting the bottom rate, raising taxes on the top bracket and limiting the number of dependent children to increase taxes on the wealthy.
The non-partisan Tax Policy Center said at the end of 2015 that a $1 trillion tax reform in 2020 would add about $900 billion to the federal deficit. Mr. Van Hollen and others argue that a relatively clean tax reform bill and higher taxes on the wealthy could reduce the deficit by $1 trillion over a decade.
With the Republican bill under fire — even some of the GOP senators who originally helped to shape it are turning against it — the Democratic leadership may have to decide if tax reform can, in fact, avoid a government shutdown. But a new Congress and new leadership on both sides of the aisle means an open mind on taxes. Democratic senators and House members could pass legislation on the floor with little resistance in Congress.
“There’s a tremendous amount of enthusiasm in the caucus,” Senator Tim Kaine of Virginia, a Democrat and the chairman of the Democratic Policy and Communications Committee, said in