Hatch Reiterates Call To Keep Tax Reform Separate From Debt Reduction Negotiations
Outlines Why Democrats Soak the Rich Approach Hurts the Economy; Continues to Outline What Tax Expenditures Are
WASHINGTON – Today, U.S. Senator Orrin Hatch (R-Utah), Ranking Member of the Senate Finance Committee, reiterated his call that changes to the tax code should be kept separate from debt reduction discussions. In a speech on the Senate floor, Hatch said conversations regarding tax expenditures should happen as part of fundamental tax reform in order to broaden the base and lower rates. This speech is the second in a series Hatch will deliver on so-called tax expenditures.
Following are excerpts from Hatch’s speech:
On the 1990’s Flashback:
“In the 1990 budget deal, a new luxury excise tax was created, applying to yachts, aircraft, jewelry, and furs, first applying to the 1991 year. The similarities are eerie. Faced with soaring deficits, Democrats insisted that revenues be part of the equation. And how did this work out? The tax was repealed in 1993, because, as the Democratic-controlled Senate Finance Committee report — as reported by the Budget Committee — explains: “During the recent recession, the boat, aircraft, jewelry, and fur industries have suffered job losses and increased unemployment. The committee believes that it is appropriate to eliminate the burden these taxes impose in the interests of fostering economic recovery in those and related industries.”
On the Obama Administration’s Plans for Social Security:
“Just today we read in the paper that the President is eager to reform Social Security. Yet it appears that he is only willing to do so if we let the 2001 and 2003 tax cuts expire — tax cuts which only last December the President acknowledged were necessary components of our economic recovery. And I would not be surprised to see the old Democratic hobby horse — an increase in the Social Security tax max — make an appearance in the Democrats list of demands. These are non-starters, and everyone understands why. These broad based tax increases would be a weight around our economic recovery.”
On Fundamental Tax Reform:
“Our tax code is a mess. And tax expenditures must be a part of any conversation about tax reform. But I want to emphasize that the conversation about tax expenditures should happen in a conversation about broad based tax reform — reform that flattens the code while lowering rates. The conversation about tax expenditures should be a sober one in the context of a meaningful discussion about tax policy. Unfortunately, the President has chosen instead to target tax expenditures willy nilly with little regard for the policy implications of these tax hikes.”
On the Campaign Against Tax Expenditures:
“The campaign against tax expenditures is a campaign for a tax increase. It is a tax increase that could send the wrong signal to those Americans who sacrifice current consumption and save for retirement. It could raise the bar for those Americans who want to experience the American dream of home ownership. It would mean the residents of high tax states would face even higher state and local taxes. And it could mean a cutback back in the volume of charitable giving. This is shared sacrifice that the nation cannot afford.”
Below is the text of Hatch’s full speech delivered on the Senate floor this afternoon:
Mr. President, yesterday, I spoke here about the matter of tax expenditures. I would like to expand on that topic today. Tax expenditures are becoming a critical issue in the negotiations over the debt ceiling. Democrats say that they want to eliminate them. They refer to them as loopholes or spending through the tax code.
This might be a good political argument, but it bears little relationship to the understanding of tax expenditures in tax law or tax policy. Yesterday, I outlined a general definition of tax expenditures. They are most definitely not spending through the tax code, as President Obama so creatively put it. And they are most definitely not, by and large, loopholes. Rather, they were intentionally included in the tax code by Congress in order to realize certain policy goals. What tax expenditures are is an opportunity for families and businesses to keep more of their income.
Unfortunately, rather than have a serious conversation about tax expenditures and tax policy, President Obama and his liberal allies are intent on setting new ground for juvenile public discourse. Faced with a $14.3 trillion dollar debt, Social Security and Medicare programs that are set for bankruptcy — ruining America’s seniors — and a legitimate fiscal crisis that poses a clear and present danger to the nation’s security and the security of America’s families and businesses, President Obama is talking again about shared sacrifice.
The first time we really started hearing about this concept of shared sacrifice was in the debate over ObamaCare. For those who are unfamiliar with Washington-speak, this is what the President meant by shared sacrifice. I am going to raise taxes on families and businesses by over a half a trillion dollars, and I am going to do it by shaking down businesses.
He made them an offer they couldn’t refuse. Pay up now, or pay up more later. So when we started hearing again about shared sacrifice, we knew what was coming — more proposals for tax increases. But I have to say I remain shocked at how ham-fisted most of these proposals are.
They really are nothing but a series of bad talking points that can be used for the President’s reelection campaign. These talking points were tired by the end of the 1936 presidential election. I would not be surprised to see President Obama dust off Franklin Roosevelt’s speeches and start railing against economic royalists by the end of the debt limit negotiations. Sadly, the Senate’s leadership has followed suit.
After making a big to-do about keeping the Senate in session to address the fiscal crisis, we are spending this week debating a non-binding resolution demanding higher taxes on millionaires. Really? The Democrats’ solution to $14.3 trillion in debt is to attack corporate jets?
I never underestimate liberals’ lack of respect for the intelligence of the American people, but this is a new low. Do they really think that ordinary Americans are so consumed with class hatred that they will respond like Pavolvian dogs to the criticism of corporate jets and forget that it was programmatic liberalism — not bonus depreciation for corporate jets of tax benefits for energy companies — that got us into this debt crisis? And is this really how the left perceives Republicans?
They want to score some cheap points against Republicans by going after corporate jets — as though all Republicans just love corporate jets. What are we going to get next week? A tax on monocles and top hats? Maybe we will spend next week debating a non-binding resolution on the need to tax madras blazers for the good of the country. Unfortunately, not all of the Democrats proposals are a laughing matter.
They have been down this road in the past, pushing tax increases on luxury items like yachts. Today, the press ridiculed Republicans for “defending the yachting class.”
There is no yachting class in this country, unless you count the Democratic Party of Martha’s Vineyard. But there is a class of people who build yachts. This is what happened to those people the last time the Democrats engaged in class warfare of this kind.
In the 1990 budget deal, a new luxury excise tax was created, applying to yachts, aircraft, jewelry, and furs, first applying to the 1991 year. The similarities are eerie.
Faced with soaring deficits, Democrats insisted that revenues be part of the equation. And how did this work out? The tax was repealed in 1993, because, as the Democratic-controlled Senate Finance Committee report — as reported by the Budget Committee — explains: “During the recent recession, the boat, aircraft, jewelry, and fur industries have suffered job losses and increased unemployment. The committee believes that it is appropriate to eliminate the burden these taxes impose in the interests of fostering economic recovery in those and related industries.”
Republicans are not defending the yachting class. They are defending the people whose jobs will be lost due to Democratic class warfare.
Of course, the left cannot contain themselves to these targeted tax increases. Just today we read in the paper that the President is eager to reform Social Security. Yet it appears that he is only willing to do so if we let the 2001 and 2003 tax cuts expire — tax cuts which only last December the President acknowledged were necessary components of our economic recovery.
And I would not be surprised to see the old Democratic hobby horse — an increase in the Social Security tax max — make an appearance in the Democrats list of demands. These are non-starters, and everyone understands why. These broad based tax increases would be a weight around our economic recovery.
But the issue of tax expenditures continues to cause confusion and must be addressed. Those who advocate limiting or eliminating these expenditures suggest that they are spending and loopholes that benefit wealthy individuals.
Yesterday I offered a grown-up definition of what a tax expenditure is. Today, I would like to highlight which are in fact the top tax expenditures. What we will find is that the tax expenditures that would generate the largest amount of revenue are also those that are available to the middle class, enabling them to give to their churches and synagogues, and to save for a home, for college, and for retirement.
To really get at meaningful deficit reduction, Democrats would have to eliminate these expenditures. Is that really something that they want to do? That might be a good question at the President’s next press conference. Maybe someone could give him a copy of this chart, and ask which of these tax expenditures he is willing to eliminate in the interest of deficit reduction.
I encourage my friends to take a look at this chart. It is a list of the top ten tax expenditures. With the rhetoric coming out of the White House, you might be surprised to learn that tax benefits for yachts and corporate jets are not in the top two.
Not only do they not make the top ten. They don’t even come close. In the context of the President’s trillion dollar deficits, they are statistical noise. So what are the big tax expenditures?
At number one is an issue from the ObamaCare debate. It is the exclusion for employer-provided health insurance. The exclusion of employer-provided health insurance from income is the single largest tax expenditure, representing 13 percent of tax expenditures.
Yesterday a member of the other side’s leadership pointed out that the largest tax expenditure is one for corporations. Boy is he wrong! Here's what he said. I quote:
“The biggest single deduction is the employer’s exclusion for health care premiums. So employers are able to exclude from income the amount of money they spend for health insurance for their employees. That’s the biggest.”
Well, that’s just an incorrect description of the law. Employers always have been allowed, and should be allowed, a deduction for the cost of benefits it provides to its employees. Employee compensation, including the provision of health insurance to one’s employees, is a cost of doing business and thus is properly deductible by the employer so as to accurately measure the income, or profit, of the employer. That has never been considered a tax expenditure. The exclusion at issue, which is a tax-expenditure, refers to the employee’s tax treatment, not the employer’s tax treatment. That is, most compensation that an employee receives from his employer is includable as taxable income – one of the few exceptions to that general rule is that employees do not include in taxable income the value of employer-provided health insurance.
Coming in at number two is the home mortgage interest deduction. This expenditure alone accounts for 9 percent of tax expenditures. The third largest? There we have the lower rate on capital gains and dividends. Do away with this expenditure and the rate on capital gains and dividends will almost triple in about 18 months. Capital gains and dividends represent 8 percent of all tax expenditures.
What’s number four? Here we have the untaxed piece of Medicare benefits. Imagine that, Mr. / Mdme. President. I wonder how many folks on the other side realize this. When my friends on the other side categorically talk about cutting back tax expenditures as the yellow brick road to deficit reduction, I wonder if they know that hiding behind the curtain is an increase in the after-tax cost of Medicare.
Do my friends on the other side realize this? A few months ago, a liberal group ran an ad showing my friend, the Chairman of the House Budget Committee, Paul Ryan, pushing an old woman in a wheelchair over a cliff.
His crime? Recommending policy changes that would prevent the inevitable bankruptcy of Medicare. I am not going to hold my breath waiting for this same group to pull the fire alarm because the Democrats’ talk of eliminating tax expenditures might result in seniors getting hit with higher taxes on their Medicare benefits. But this is what Democrats are talking about.
If they are serious about using tax expenditures to reduce the deficit, these are the things that will have to be on the table. This expenditure is real. You can look it up in the handy tax expenditure publication from the non-partisan Joint Committee on Taxation. And it is significant, representing 7 percent of all tax expenditures.
At number five is the pre-tax treatment for defined benefit pension plan contributions and the inside buildup on the accounts. This is a tax benefit that reduces the cost for those workers who make the decision to save for retirement. This represents 6 percent of tax expenditures.
What’s number six? It is the refundable earned income credit or EIC. When folks describe tax expenditures as spending through the tax code, this is one that could be properly labeled that way. Under Congressional budget rules, this one, for the most part, scores as spending. That’s not the case with the other tax expenditures on this list. Refundable tax credits score as spending because the government cuts a check to the taxpayer. With the other tax benefits on this list, the taxpayer is receiving a portion of the money back in the form of reduced taxes. There’s some serious tax hikes there. This tax expenditure accounts for 5 percent of tax expenditures.
Number seven is the deduction for state and local taxes. My friends on the other side need to be particularly careful with this one. So far, they would hit seniors, families that have health insurance through their employers, people with mortgages, and anyone who owns stocks and bonds. But with this, many Democrats risk alienating every last taxpayer in their states.
Removing this deduction is going to hit high-tax states hard. If you are from a so-called Blue State, it is likely that constituents are already heavily burdened with state and local taxes. Take away this and you will, in effect, drive up the marginal rate of your constituents’ who take their deduction by as much as 35 percent.
I am convinced that many of the inroads Democrats made between 2006 and 2008 were due to carefully crafted Trojan Horse campaigns. Skillful operatives ran Democratic campaigns promising moderate tax and spending policies that would be respectful of families and businesses.
But once that Trojan Horse got inside the Capitol, and former-Speaker Pelosi and President Obama took charge, frustrated liberals spilled out and started taxing anything that could move to pay for the largest expansion of government since Lyndon Johnson was in office.
Removing the deduction for state and local taxes might be the final act that restores purple America to its traditional red hue. At five percent of all tax expenditures, this would represent a massive tax increase.
What’s number eight? This is the pre-tax treatment for the contributions workers make to their defined contribution plans and the inside build up on the accounts. Many of us know of these retirement plans as 401(k) plans. At four percent of tax expenditures, this is a significant incentive to families to save for retirement.
Number nine is a bit more obscure, but no less critical for families. It is the tax expenditure for the step up in basis at death. We all know the saying that nothing is as certain as death and taxes. Well, if this tax expenditure were eliminated, this saying would take on an even darker meaning. Death could now be taxed twice. First, the decedent’s estate might get hit with the death tax. Then the decedent’s heirs would be subject to tax again on the gain embedded in any inherited asset, should they decide to sell it. This accounts for four percent of tax expenditures.
We close with number ten, the tax expenditure that is probably the most important one to my constituents in Utah. It is the tax benefit for donations to charities other than education and health care institutions. When you make your weekly, or yearly, donation to your church, you can deduct it for tax purposes. This charitable deduction represents four percent of tax expenditures.
As the chart shows, these widespread everyday tax policies account for almost two-thirds of tax expenditures. We’re not talking about yachts or corporate jets. Now, I have already suggested it, but rolling back many of these expenditures would have an immediate adverse impact on American families and taxpayers. It would also undercut longstanding federal policies promoting saving, home ownership, and charitable giving. Let’s turn first to retirement security.
About half of Americans save for retirement. The overwhelming bipartisan consensus is that this number is way too low. Ideally, all American workers would be saving for retirement. More savings means less financial stress on Social Security and Medicare. Most importantly, it means retirees can enjoy their retirement if they can rely on a nest egg. That’s why there has been a bipartisan desire to incentivize retirement savings through worker participation in retirement plans.
A time-honored method has been to offer a tax benefit up front in the case of the traditional defined benefit plan, traditional defined contribution, or traditional IRA. The benefit remains untaxed during the individual’s working years. It is only taxed when received in retirement. By contrast, Roth pension plans and IRAs provide a tax benefit on the back end, when a worker retires and begins drawing on the account. Former Finance Committee Chairman William Roth captured the policy rationale best by noting the deliberate tax policy bias toward savings. Chairman Roth used to make the point with a rhetorical question. He’d ask: “Is there any bad saving?” Of course, the answer is no.
One thing we know for sure. Curtail or eliminate the tax expenditure for retirement savings and the after-tax cost of savings will rise. Savers will react. It is true that some will continue to save. But it is also true they will have less to save if they choose to do so. For middle income taxpayers, it will probably mean lower savings rates. Is that a good policy to put in place?
Consider this. According to the Joint Committee on Taxation, for 2009 over half of households paid no income tax. Forty-nine percent of Americans shouldered 100 percent of the income tax burden.
The half shouldering the income tax burden are also, generally speaking, the part of the population making sound personal decisions like saving for retirement. That behavior is good in both a micro and macro sense. In the micro sense, workers are sacrificing current consumption for security and a better standard of living in the future. On a macro sense, the collective behavior of these citizens stabilizes our aging society.
To encourage this kind of sacrifice, our tax policy provides a tangible tax benefit. Take away that tax benefit and, as with raising taxes on anything else, you will get less of the behavior. Take away the tax benefit, and you will get less saving for retirement. Mr. President, does that make any sense?
In order to avoid restraining the rapid growth in government spending, our friends on the other side would have us send the wrong policy signal to the half of our population that saves. They would add to the burden of those who are already shouldering the entire burden of funding the federal government. At the same time, by discouraging saving and personal responsibility we would further unleash the appetite of those who want us to spend more.
Take another look at the chart. Add up the tax expenditures from defined benefit plans and defined contribution plans. They account for 10 percent of tax expenditures. Over five years, the revenue from these expenditures amounts to almost $700 billion. On a per year average basis, it is $140 billion. That’s an annual policy shift of $140 billion in incentives for private savings to $140 billion in incentives for growing government spending.
Do we want a society where more saving is encouraged? Or do we want a society where dependency and more government spending are encouraged? Do we want to look more like Switzerland? Or do we want to look like Greece?
The answer to this question is clear to the citizens of this country. Unfortunately, not all of their representatives seem to have thought through the implications of going after tax expenditures.
To get at this from another angle, I would like to discuss the impact on taxpayers of cutting back some of these tax expenditures that come in the form of itemized deductions. I am going to examine the effects of cutting back these itemized deductions by applying President Obama’s budget proposal to cap itemized deductions at 28 percent.
It is clear that some in the White House are pushing this 28 percent cap hard in the negotiations over the debt limit. As noted before, itemized deductions generally are considered tax expenditures. But itemized deductions impact a number of basic, long-standing features of American life. Itemized deductions include the home mortgage interest deduction, the charitable contribution deduction, and the state and local tax deduction. The President is proposing to chisel away at these itemized deductions, and we should carefully reflect on what that would mean.
President Obama has proposed repeatedly “to limit the tax rate at which high-income taxpayers can take itemized deductions to 28 percent.” It appears that this proposal is designed to lessen the benefit to higher income taxpayers of itemized deductions. The Joint Committee on Taxation says that this provision would mean the Federal government would collect an additional $293 billion in taxes over ten years.
True to form, this is just another version of the same soak-the-rich play that the left has been running for decades. From their perspective, it is unfair that higher income individuals get a more valuable tax benefit than lower income individuals? But this perspective mischaracterizes a critical issue. The 35 percent bracket was established by Congress with an understanding that itemized deductions would allow a significant tax benefit. Had Congress known that higher-income taxpayers would be disallowed some of their itemized deductions — as the President now proposes — undoubtedly Congress would have set that bracket at lower than 35 percent.
So, taking away some of the benefit of itemized deductions for higher-income taxpayers, while leaving the high-income tax rates at their current levels, upsets the balance struck by prior Congresses. Obviously, Congress is allowed to do this, but let’s not pretend that these expenditures are loopholes or oversights by prior Congresses. The President and the Senate’s Democratic leadership are free to do this if they choose, but they should at least come clean about what they are doing. They are significantly raising taxes on the people who are already shouldering the lion’s share of the federal income tax burden.
Even aside from the staggering character of this tax increase — one that would clearly violate President Obama’s campaign pledge not to raise taxes on middle class Americans — the macroeconomic impact of this cap is negative at best.
President Obama’s 28 percent cap would reduce the benefit from the home mortgage interest deduction. For five years now, our nation has been experiencing a bursting of the real estate bubble. Current headlines indicate that this trend will continue for a time. Limiting the value of the home mortgage interest deduction would apply additional downward pressure on home prices — not only for high end homes, but for all homes. By repeatedly proposing to limit the benefit of the home mortgage interest deduction, is it the President’s intent to further depress housing prices, or is this mere collateral damage from his desire to raise taxes.
But the damage from this cap does not stop at the housing market. President Obama’s 28 percent cap would also reduce the benefit from the charitable contribution deduction. This would almost surely reduce the amount of contributions people would make to churches, synagogues, temples, soup kitchens, shelters, universities, and museums. Is that the President’s intention? Does the President know that these revenues might never materialize because the elimination of this deduction will step up pressure for direct government assistance for the poor, for students, and for the arts?
Finally, this cap would reduce the benefit of the state and local tax deduction. I touched on this point earlier. High-tax states are able to soften the blow of their high taxes by pointing out to their citizens the federal deductibility of such taxes. So, my colleagues from high-tax states might want to talk to their governors about the impact the President’s proposed cap would have on state and local public finance.
Mr. President, I want to be clear about something. Our tax code is a mess. And tax expenditures must be a part of any conversation about tax reform. But I want to emphasize that the conversation about tax expenditures should happen in a conversation about broad based tax reform — reform that flattens the code while lowering rates.
The conversation about tax expenditures should be a sober one in the context of a meaningful discussion about tax policy. Unfortunately, the President has chosen instead to target tax expenditures willy nilly with little regard for the policy implications of these tax hikes.
And make no mistake. Whatever the President wants to call it — reducing spending through the tax code, closing loopholes, or making people pay their fair share — these are tax increases plain and simple. And they are tax increases on the middle class. There has been some criticism in recent days about Republicans for their commitment to a pledge many of them took against any net tax increase. I have to admit I am at a loss here.
Conservative Republicans, convinced that taxes are already high enough, promise their taxpaying citizens that they will never support a net tax increase. They gave their constituents their word, and are sticking to it.
Meanwhile, President Obama, who promised not to raise taxes on the middle class when running for office, vows to break this promise at every opportunity. And yet it is the conservative Republicans who are somehow lacking integrity? Mr. President, I don’t care how many blows I take from sophisticated Washingtonians and professional leftists for sticking by my pledge to the people of Utah. I will resist any effort by the President to include tax increases as part of the deal to increase the debt ceiling. I will do so for a number of reasons. First, our tax code needs a fundamental overhaul. It is a complicated mess that is lacking in fundamental fairness. Yet the President’s proposal to reduce tax expenditures for deficit reduction, is a proposal to maintain a tax code that grows more burdensome by the day. The President’s proposal essentially robs the government of the revenues that it might use later to flatten the tax code and lower rates.
More importantly, I oppose the President’s proposed tax hikes as a matter of principle. Flattening the tax base without any offsetting rate reduction is a tax increase. My friend, the Ranking Member on the Senate Budget Committee, Senator Sessions captured the point well in an interview the other day. I’ll quote Senator Sessions.
“We have to be honest and recognize that if you are going to eliminate systematically a host of deductions and keep the money or spend it for new programs, then you’ve raised taxes . . . . It just is unless we’ve changed the English language.”
The campaign against tax expenditures is a campaign for a tax increase.
It is a tax increase that could send the wrong signal to those Americans who sacrifice current consumption and save for retirement. It could raise the bar for those Americans who want to experience the American dream of home ownership. It would mean the residents of high tax states would face even higher state and local taxes. And it could mean a cutback back in the volume of charitable giving. This is shared sacrifice that the nation cannot afford. Thank you. I yield the floor.
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