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Senator Van Hollen Introduces Proposal to Raise Taxes on High-Income Households

3 min readBy: Chad Qian

Last week, Senator Chris Van Hollen (D-MD), speaking at an event on income inequality hosted by the Economic Policy Institute, spoke in favor of making the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code much more progressive. Arguing against a “dynastic economy based on existing wealth,” he promised to introduce a surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. bill later this summer.

Van Hollen said his bill would feature two proposals to raise taxes on high-income households. First, the bill would create a 10 percent surtax on incomes above $2 million. This would make the marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. on those incomes 47 percent. He was somewhat vague about the specific details of this bill; for example, it is unclear if the $2 million threshold is taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. or adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” . He did say, however, that the surtax would “apply equally to labor and investment income.” The bill would also eliminate step-up basis of capital gains at death.

The revenue generated from these taxes, Van Hollen said, would be used to fund the Keep Our PACT Act that he introduced earlier this year. That bill would increase federal spending on K-12 education. Specifically, it would fully fund both Title I and the Individuals with Disabilities Education Act.

Van Hollen’s surtax bill follows other tax bills he and other Democrats have proposed in the current 116th Congress. Earlier this year he proposed a financial transactions tax bill with Senator Brian Schatz (D-HI), Senator Kirsten Gillibrand (D-NY), and Senator Jeff Merkley (D-OR). The Wall Street Tax Act of 2019 would apply a 0.1 percent tax to the sale of any stock, bond, or derivative. Van Hollen argues that this tax, in addition to raising revenue and making the tax code more progressive, would “cut down significantly on…risky trading practices.” Previous analysis, however, suggests that such a tax would increase investment costs, distort economic decision-making, and potentially increase market volatility.

Van Hollen last week also proposed a change to the estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. . The Strengthen Social Security by Taxing Dynastic Wealth Act would return the estate tax to its 2009 format. Currently, the first $11.4 million of an estate are tax-exempt, and the maximum estate tax rate is 40 percent. Under Van Hollen’s proposal, the estate tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. would fall to $3.5 million, and the maximum estate tax rate would increase to 45 percent. He argues that an estate tax is necessary, in part, to “prevent the rise of a permanent aristocracy” in the United States. His bill would use the revenue generated from the estate tax expansion to help fund Social Security.

Van Hollen has also introduced tax legislation aimed at the corporate sector, with Senator Amy Klobuchar (D-MN) and Senator Tammy Duckworth (D-IL). The Removing Incentives for Outsourcing Act would modify the current GILTI tax system, shifting from a global minimum tax to a country-by-country minimum tax and dropping the 10 percent qualified business asset investment exemption. Van Hollen argues that this bill would help close the “loopholes” in the tax code that he says incentivize companies to shift production abroad.

Van Hollen’s proposals add to the long list of Democratic Party tax proposals that attempt to both raise additional revenue from corporations and high-income households and make the tax code more progressive and “equitable.” These types of policies will clearly be a priority for the Democrats throughout the next few years.

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