DC dispatch: senators and witnesses quarrel over tax reform in Budget Committee hearing - does Wall Street pay its fair share? - JURIST

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DC dispatch: senators and witnesses quarrel over tax reform in Budget Committee hearing – does Wall Street pay its fair share?

Sharon Basch | U. Pittsburgh School of Law, US

June 13, 2024 01:41:32 pm

Sharon Basch is a rising 3L at the University of Pittsburgh School of Law and a JURIST staff correspondent in Washington DC this summer.

Wednesday morning I attended a US Senate Budget Committee hearing entitled “Making Wall Street Pay its Fair Share: Raising Revenue, Strengthening Our Economy.” The hearing was called to discuss tax policy and law with relation to large firms, companies, and CEOs, with the aim of creating a fairer and stronger economy by making CEOs and wealthy investor pay their fair share. The hearing was chaired by Senator Sheldon Whitehouse (D-RI), who opened with a reminder that the 2017 Trump tax cuts (The Tax Cuts and Jobs Acts) will expire in the coming year.

Whitehouse claimed that the Democratic party was fighting to reduce the deficit and change tax law to ensure that Wall Street pays its taxes. Referencing a chart he presented, Whitehouse shared that despite inflation, CEO pay is off the charts, and that 1% of Americans owned 54% of the stock market (out of American stockholders, excluding foreign holders of US stock). While corporate taxes once paid a fifth of revenue for the federal government, they now pay less than 1% – leaving the brunt of the revenue to come from American taxpayers (according to taxpolicycenter.org, in 1950, corporate tax contributed up to 30%, as compared to 6.5% as of this year; additionally, revenue from corporate tax has fallen from an average of 3.7% of the GDP, to 1.5% over the past ten years). Senator Whitehouse continued, saying that as Donald Trump wants to enact trillions of dollars more in tax cuts for the 1%, “It’s not enough just to undo the damage of the Trump tax law—our tax code wasn’t fair before that. Instead, we must finally de-corrupt the tax code so that the wealthy and corporations finally pay a fair share.”

Ranking Member Senator Charles Grassley (R-IA) lambasted Whitehouse’s opening statement. He responded that he believes that Congress absolutely should review and examine the tax code objectively, and that clearly the present review was not about a bipartisan effort to do so. Abuse of tax loopholes must be examined, but he claimed that in this hearing “today’s majority will demagogue complex issues and deride the Republicans for protecting Wall Street.” He sharply criticized democrats further, stating that “Democrats pretended they were cracking down on private equity moguls,” because many fund Democratic campaigns, and while “…Democrats publicly and continuously blast carried interest as a loophole for the rich and blame Republicans for its existence. Yet, when they’ve had full control of the levers of power, they’ve repeatedly failed to eliminate it.”

Three witnesses were called – Dr. Joseph Stiglitz, a University Professor Of Economics at Columbia, Ms. Sarah Anderson, the Global Economy Director for the Institute For Policy Studies, and Dr. Michael Faulkender, the Dean’s Professor of Finance at the University of Maryland.

Dr. Stiglitz began his testimony with a view of future tax policy. There are four directions for reform to transform the tax code into what it should be — they all center on making our tax code more equitable and helping it to create a more dynamic economy that promotes the well-being of all Americans, rather than just Wall Street and other corporate giants or the wealthiest individuals.

He listed four categories of reform. The first set of reforms should focus on closing tax loopholes and eliminate the special provisions that result in the richest individuals and most profitable firms not paying their fair share of taxes. The second, would involve eliminating special provisions that are directly distortionary. He used large subsidies the federal government provides through the tax system for fossil fuels. The third category of reform is curtailing activities that generate negative externalities and encouraging those that generate positive externalities; for example, carbon and environmental taxes. The last category of reforms would focus on more non-distortionary areas. He listed a few examples – windfall profits taxes, land speculation taxes, and monopoly rent taxes, which largely favor the rich to the detriment of the average American. All of these reform types aimed at increasing the efficiency of the tax system and improving equity.

Ms. Anderson was next to testify. She began with a powerful overview:

Congress and regulators have taken steps to protect our country from the Wall Street greed that was a key driver of the 2008 crash. But financial institutions still extract too much wealth from working families and funnel too much of that wealth into massive executive bonuses that encourage excessive risk-taking – and even financial fraud. And, as we saw with the spate of regional bank failures in 2023, reckless executives can still drive their firms into the ground and walk away with grand fortunes while relying on taxpayer money to contain the damage.

Anderson, like Stiglitz, decried tax loopholes that allow large firms and banks to get away with paying a very low effective tax rate. She continued by disparaging provisions in the Tax Cuts and Jobs Act that were ineffective in preventing offshore tax avoidance, while praising the 2022 Inflation Reduction Act for taking steps to reduce such tax avoidance. More controversially, at least judging by the expressions on the hearing committee members and audience, Anderson stated that stock market transactions should be taxed – causing large firms and hedge funds to pay much more on their income. Anderson continued, decrying carried interest (managers of hedge funds pay the discounted capital gains tax rate on “carried interest” – earnings tied to a percentage of the fund’s profits). Another important topic she covered (and again, has submitted to the record a chart that very clearly outlines the issue) is disproportionate and exorbitant CEO pay – which only continues to rise year-on-year despite job-slashing and pay cuts to workers. Additionally, CEOs practice of stock buybacks (which artificially inflate the value of a company) pumps up executive salaries, which analysts have associated with worker layoffs and wage stagnation. Follow the link to Anderson’s testimony above, if only to view her detailed charts.

Finally, Dr. Michael Faulkender, the witness for the Republican minority, began his testimony with an oft-repeated phrase in the Republican party: “The USA does not have a revenue problem, it has a spending problem.” Faulkender continued by explaining that rising inflation and declining real wages are the real problem, and that taxing the rich will not help reduce the federal deficit. According to Faulkender, the US has seen average price increases exceeding 19% and average weekly earnings have only risen 14.6% since President Biden took office. He then described what he sees as real solutions, because he claims that taxes on the rich will reduce economic growth and output, that “less economic activity and the same or lower revenue to the government will not solve our budget, inflation, or growth challenges.” He closed with his vision of necessary change:

Our Nation needs to address the staggering budget deficits that have put us on an unsustainable fiscal path. Rather than raising taxes and taking even more money out of the productive side of our economy, the American people would benefit by repealing the trillion dollars of green corporate welfare in the IRA, stop the Biden Administration’s illegal student loan forgiveness activities, return non-defense discretionary spending to pre-pandemic levels, and reverse the regulatory burden that has caused inflation and high interest rates that have made debt service costs now larger than what we spend on defense or Medicare.

Questioning began with Sen. Whitehouse asking Dr. Stiglitz: “Is tax avoidance for the wealthy an industry?” Stiglitz responded, that it wasn’t just an industry, but a global industry. Wealth advantages include the ability to operate in multiple countries, to hire the best tax lawyers, and avoid taxes rather than contributing to the economy. Sen. Grassley takes over, asking Faulkender if the Democrats chose not to enact many of the proposals on the table today. He responded that it was true, and even if these policies had been implemented, higher taxes on the 1% would not be nearly enough to reduce the deficit. Grassley continues, “Do higher tax rates cause stability? Faulkender replied that this is not the case – it had been tried in Sweden and then saw a decrease in the market value. Grassley raises his voice, lamenting that a massive tax hike makes no sense. “It is ridiculous to think you can raise the marginal tax rate to 93%. Who would be stupid enough to do this?!”

Senator Ben Lujan (D-NM) followed, asking Dr. Stiglitz how it is possible for the wealthy to avoid paying taxes on up to 75% of their income. He questions whether the money would be better spent on investments like universal preschool, or compensation for radiation poisoning in New Mexico. Stiglitz replies that the tax code simply gives the wealthy the opportunity to avoid taxes.

Senator Ron Johnson (R-WI) chimed in enthusiastically, “Does any witness here want to defend the current code?” The witnesses remain silent. “No? It is too complex, instead of reforming the current code, it should be simplified and rationalized. Shouldn’t we do this instead?” Faulkender tries to answer but is interrupted by Johnson – “Punishing success doesn’t work! What is the maximum percentage someone should pay?” He directed the question to Anderson, who attempted to answer, explaining that the first and last dollar should not be treated the same – but was interrupted again, by Johnson: “What is the number? This is an easy question, just give me the number.” He turned to Dr. Stiglitz, “So how can we close the loopholes?” Stiglitz begins an answer similar to that of Anderson, but again, was interrupted by Johnson, claiming that the 2017 tax policy put 95% of business at risk. Faulkender responded that there should be a uniform simple income tax for all, lowering rates and broadening the base.”

The atmosphere was intensifying. Senator Whitehouse tried to redirect the conversation and attempted to explain what Anderson and Stiglitz were attempting to answer, that it cannot be that simple, and that the tax rate must matter on whether it is the first, ten thousandth, millionth, billionth, or last dollar that is being taxed.

Senator Mitt Romney (R-UT) interjected as vociferously as Johnson did before. He shared a hypothetical, “Say it’s the billionth dollar? What should that last dollar be taxed?” Sen. Whitehouse responded that it should be taxed well over fifty percent. Senator Jeff Merkley (D-OR) cut in, telling a story of his father asking why working people paid more taxes than millionaires. He quoted Donald Trump from a recent campaign speech, who asked the wealthy to increase their donations to his campaign from $2-3 million to $25 or 26 million, because his tax policy would benefit the wealthy more than President Biden could. Merkley resumed, explaining that he goes to town halls all across Oregon, including to areas where constituents did not vote for him. The constant and main issue the people brought up was the cost of housing. He described the growing roles hedge funds have – that 40% of single-family housing was being bought by hedge funds.

Romney, in an incredulous tone, calls the meeting “astonishing.” He explained that “We have never met as a committee to talk about the tax code, you are all seeing the first conversation right now. This is a performance, but the joke is on us because no one is watching! Things that cannot continue, won’t – if we don’t deal with this now, we’ll have a catastrophe.” He explained that if the United States removed all spending except for the military, there would still be a deficit. He questioned how it was possible that a company could follow this reasoning and make a profit. It is not possible that they are not paying taxes. Anderson attempted to answer that companies have ways of avoiding taxes. Romney interrupted, “No, no, no, no, companies ARE paying their taxes to the government, but Democrats base this accusation on Wall Street. The United States is a global leader in its progressive tax policies. We have to look at spending, focus on cuts that won’t affect the economy – and not what was shared today. ‘Don’t fix what ‘aint broke.'”

With a brief conversation of the climate’s ill effect on the economy, the hearing closed. There seemed to be very little agreement on any solution, except that a solution was needed.

Susan Harley, the managing director for Public Citizen’s Congress Watch division (a non-profit, progressive consumer rights advocacy group) shared some of her thoughts with me afterward. As Public Citizen advocates for policies that tax Wall Street trades, reining in out-of-control executive compensation, and otherwise having corporations pay their fair share, she was thankful for the hearing that to expose the myriad ways the Wall Street is able to escape payment. Echoing numerous senators throughout the hearing, Harley concluded that these issues do not get the attention that they should.

While tax law and policy can be confusing and difficult for the average American citizen to fully grasp, this hearing made it ever more clear that as citizens, we really should be paying more attention. I walked out of the room, finding myself grappling with points made by the witnesses and senators, struggling, just as the committee struggled, to assume or agree with any of the possible solutions presented.

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