At a hearing held by the Senate Finance Committee on Wednesday to discuss the committee’s ongoing efforts to reform the tax code, Sen. Max Baucus, D-Mont., chairman of the panel, said the lower tax rates for the nation’s wealthiest workers must expire, “rather than making major cuts to Social Security or Medicare.”
As the nation faces “a struggling economy and record deficits, we need to do something to tackle these problems, and do so in a balanced way that creates jobs in the process,” Baucus said at the hearing, Tax Reform Options: Marginal Rates on High-Income Taxpayers, Capital Gains and Dividends. But “putting the full load of deficit reduction on seniors, veterans and middle class families, for example, when the wealthiest can afford to pay a little more, simply doesn’t make sense.”
In these tough economic times, Baucus said, it makes sense to ask “some of the wealthiest in our society to contribute,” rather than to “make real changes to programs seniors depend on like Social Security and Medicare,” or “cut programs or raise taxes on veterans, servicemen and women and middle class families.”
But Sen. Orrin Hatch, R-Utah, argued at the hearing that the "American people want Washington to get its spending under control, not to tax them more.”
Those who promote tax increases, he continued, “know that they simply cannot raise enough money to pay for their spending priorities only by taxing individuals and small businesses in the top two brackets.”
Baucus went on to state some troubling statistics. Since 2007, he said, Americans’ real median household income has fallen by 6.4%. “It’s the lowest income we’ve seen since 1997,” he said.
Over the past three decades, Baucus said, the incomes of the richest 1% of Americans have risen much more rapidly than the other 99% of Americans. “That gap continues to widen both before and after taxes," he said. "During that time period, the after-tax incomes of the top fifth of taxpayers grew nearly eight times faster than those of the bottom fifth.”
Baucus cited legislation he introduced last year to allow the current top two tax rates to expire for those with incomes above $200,000 and married couples with incomes above $250,000. This proposal, he said, “would mean that the top income tax rates of 33% and 35% would return to 36 and 39.6%, respectively.”
Historically, he said, “the top tax rates have been much higher than the current rates–and these proposed rates. In fact, over the last century, the average top rate has been 59.2%.”
The lower tax rate for capital gains and dividends “further complicates the picture,” Baucus said.
Capital gains and dividends, Baucus said, “are generally taxed at a rate 20 percentage points below the top income tax rate that high-income workers pay on their wages, and earnings from capital gains and dividends constitute a larger share of income for high-income taxpayers than for most Americans.”
In fact, he continued, capital gains make up 57% of adjusted gross income for the richest 400 taxpayers.
Low capital gains and dividends rates helped these extremely wealthy taxpayers, who had an average income of $345 million in 2007, pay an average tax rate of only 17%, a rate far lower than many middle-class families pay, he said.
“There are important reasons why it might make sense to tax capital gains at lower rates than ordinary income,” Baucus said, for example, “if the gain is on stock in a company that has already paid corporate income tax.”
But is it fair, he asked, “for someone with $345 million in yearly income to pay income tax at a rate lower than many middle-class families?”