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Democrats' latest plan to close the income gap

Democrats have released a new tax plan that takes from the richest Americans and Wall Street to help the middle-class.
The New York Stock Exchange (NYSE) building is pictured on Oct. 16, 2014 in New York, N.Y. (Photo by Jewel Samad/AFP/Getty)
The New York Stock Exchange (NYSE) building is pictured on Oct. 16, 2014 in New York, N.Y.

Democrats have seized on stagnant wages as the prevailing economic problem of our time—and they say it's one big reason Democrats aren’t getting more credit for the recovery from voters.

Many of their proposed solutions have focused on the lowest-wage workers, calling for a higher minimum wage and a stronger safety net. But Democrats are now embracing a more full-throated kind of populism, releasing a new tax plan that takes from the richest Americans and Wall Street to help the middle class. 

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“Giving working Americans a larger share of the economic pie can make the entire pie grow faster. And even the wealthy can be better off with a smaller slice of a rapidly growing pie,” said Rep. Chris Van Hollen, Democrat of Maryland, unveiling the plan in a speech on Monday.  

Under Van Hollen's new proposal, working Americans earning up to $100,000 would receive a $1,000 tax credit per individual; working couples earning up to $200,000 could receive up to a $2,000 tax credit. The plan also increases tax credits for child-care expenses, creates a new credit that rewards workers who save for retirement, and reduces the so-called “marriage penalty” for dual-income families. 

The $1.2 trillion plan would be paid for through new limits on tax deductions for the top 1% of American households, as well as a 0.1% fee on a broad array of financial transactions. In 2015, the top 1% will have $518,000 or more in adjusted gross income, according to the Tax Policy Center.

Such redistribution is only fair given how much wealthy Americans and Wall Street already benefit from the current tax code, said Van Hollen, the top Democrat on the House Budget Committee. 

“Our tax code today is stacked in favor of people who make money off of money—and against those who make money off of hard work,” Van Hollen said. The plan would boost broad economic growth for everyone by giving middle-class families more money to spend, he continued. The plan would benefit an estimated 150 million workers nationwide, 100 million from the paycheck tax break alone.

"Working people want not only to hear what leaders think about raising wages and income inequality, but what they’ll do about it. Rep. Van Hollen is doing exactly that," said AFL-CIO president Richard Trumka. 

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Wages for ordinary Americans have been stagnating for decades, well before the current recession, while the incomes of the top earners have soared. 

Republicans quickly attacked Van Hollen’s plan as a burdensome tax hike. "Just as the sun rises in the east, Washington Democrats propose another massive tax increase,” said Brendan Buck, a spokesman for House Ways and Means Chair Paul Ryan. “Here in the House our focus is going to be on cleaning up the tax code so that we can lower rates for all taxpayers and help create good-paying jobs, not scaring them off with punitive tax hikes.”

Ryan is hoping to move forward with comprehensive tax overhaul this year to reduce tax rates by simplifying the tax code. But a stand-alone plan like Van Hollen’s would likely make broader tax reform more difficult to pull off. “The more things you’ve added to the tax system, the more you need to offset the revenue losses in reform. In general, a more complicated system is in a sense harder to reform,” said Roberton Williams, a senior fellow at the Tax Policy Center. “It’s always better if you’re going to reform the tax system to do everything at once.”

For Democrats, however, the appeal of using the tax code to reduce the income gap is that it’s a direct way to redistribute wealth. “It’s efficient way to figure out what people’s financial situation is, and you can use the tax system as a way to deliver this kind of redistribution,” Williams said. The downside is that “it’s a rather blunt instrument,” that can have unintended consequences, he added.

In addition to the new paycheck tax credit, it would give a $250 bonus to those who deposited at least $500 of their paycheck credit to a retirement plan. It would increase the tax credit for child-care expenses from $3,000 to $8,000 per person, or $16,000 per couple. It also aims to reduce the marriage penalty by providing a 20% deduction for second earners in a household on up to $60,000 of their income. 

Separately, Van Hollen is introducing a bill that would restrict corporations from claiming tax deductions on CEO pay above $1 million unless workers also receive pay increases “that reflect increases in worker productivity and the cost of living.”

Van Hollen is still working out some critical details of his main plan. In particular, there’s little explanation of how the plan would limit tax breaks on the wealthy. Both Democrats and Republicans have proposed capping tax deductions in the past, but they’ve favored different approaches: Mitt Romney proposed a hard-dollar cap during the 2012 election, and President Obama has favored a percentage cap. And the details really do matter, as certain groups and industries have a lot to gain and lose from these tax write-offs.

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The financial transactions tax doesn’t have universal appeal among Democrats, either: The White House has opposed previous proposals to impose such a tax, arguing that it would be easy to game and could hurt economic growth. 

Van Hollen’s plan makes it clear, however, that more Democrats are embracing the kind of populism that progressive icon Sen. Elizabeth Warren has championed. And they’re trying to tailor that message to a broader swath of the public. “The obvious big winners are two-workers families with kids,” said Williams.

It's the second time in recent days that Democrats have rolled out a big new policy proposal aimed squarely at reducing inequality. Last week, President Obama announced a plan to make community college free for all qualified students. Some criticized Obama's plan for benefiting the middle-class more than low-income students, who already benefit from Pell Grant aid. But it's precisely the broad middle that Democrats seem like they want to appeal to.