In a letter addressed to President Donald Trump, Senate Majority Leader Mitch McConnell (R-KY) and Senate Finance Committee Chair Orrin Hatch (R-UT), 45 Senate Democrats (collectively, the "Democrats") expressed a willingness to work with Republicans on "bipartisan tax reform."
The Democrats asserted three "prerequisites" for a successful bipartisan tax reform plan. First, a reform plan "should not increase the tax burden on the middle class," and should not be advantageous for the wealthiest subset of Americans. The Democrats observed that wealthy Americans continue to enjoy "outsized benefits from recent economic gains" even though wages for working-class individuals have not increased. The Democrats vowed they would not back a tax reform plan that "includes tax cuts for the top one percent."
Second, any tax reform legislation must "go through regular order rather than reconciliation." The Democrats criticized the potential effects of fast-tracking legislation through reconciliation:
"Using a fast-track process like reconciliation would undoubtedly result in outsized political influence on the process and significantly hinder lawmakers' ability to close loopholes and end special interest favoritism that plagues our current tax system. As such, reconciliation is just a tool to jam through partisan short-term tax cuts that would result in economic uncertainty and instability and significantly increase our budget deficit."
Third, reform legislation should not include deficit-financed tax cuts. The Democrats stated that they would not support deficit-financed tax cuts that could jeopardize the continuation of "critical programs," including Medicare, Medicaid and Social Security.
Commentary / Mark Howe
The House blueprint relied, in large part, on the Border Adjustment Tax ("BAT") to fund, among other things, its proposed rate reductions for individuals. Those rate reductions are estimated to result in tax cuts for the top one percent of households, equal to approximately $287 billion, in contrast to a tax cut of $7 billion for the 27 million middle-income households. Given potential loss of new revenue sources and the estimated effect of the proposed tax rate reductions (see Tax Policy Center study), and the electoral map (source: time.com) that shows middle-income and lower-income core support for the 2016 Republican candidate, one potential route to fulfilling the presidential campaign promise of tax cuts directed to middle-income taxpayers would be to shift the tax cuts from the top one percent towards middle-income and lower-income households. The mechanic would be to concentrate rate reductions at the middle- and lower-income levels.
With the apparent loss of a new revenue source like the BAT, the fiscal realities of the federal debt, and the apparent Republican failure to form an effective legislative majority, this approach may lead the Trump administration to utilize the progressivity in the income tax structure to fund middle-income tax cuts. This arithmetic may lead the Trump Administration to seek Democratic support for its tax reform initiative.
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