Jan 14, 2015 - 2:15pm

Congressman Van Hollen Doubles Down on Bad Tax Policy

Former Senior Vice President, Economic Policy Division, and Former Chief Economist


Photo Credit: Julia Schmalz/Bloomberg

What do you do when everything you’ve tried fails?  When you run out of alternatives, you double down on what failed, right?  At least, that’s the most sensible interpretation of a tax proposal announced recently by Congressman Chris Van Hollen, the ranking Democrat on the House Budget Committee. 

President Obama’s economic policies have been in place since 2009, over which period the economy has managed a paltry recovery by any measure.  These policies included higher taxes, especially on entrepreneurs, small businesses, and investors, a sure-fire prescription for slower growth.  These policies also included more spending, unprecedented deficits, soaring debt, and more intrusive regulations. 

Other major legislative accomplishments have included such anti-growth gems as the Dodd-Frank financial regulation bill that served primarily to disrupt financial markets and inhibit their ability to sustain growth.  The President’s other major accomplishment was his ill-conceived, ill-explained, and ill-executed health care reform.  In light of these policies, all of which Mr. Van Hollen supported, the slow recovery should surprise no one.

In the recent election, President Obama opined to the intense chagrin of his parties’ candidates that though he was not on the ballot, his policies most certainly were.  “I am not on the ballot this fall. Michelle’s pretty happy about that. But make no mistake: These policies are on the ballot. Every single one of them.”  Very true, and the result in the President’s own words was a “shellacking”.  

Mr. Van Hollen acknowledges the failure of his party’s policies to improve the economic lot of America’s middle class families, and he is rightly concerned.  His solution is a proposal effectively doubling down on some policies he acknowledges have already failed.

The sure way to help America’s middle-class families is to allow the economy to prosper, creating jobs and opportunity while raising productivity and wages. Raising economic growth by even a half percent a year would increase a families’ annual cash wage by an average of over $1,600 a year over the next ten years. 

In sharp contrast, the Van Hollen proposal reflects a classic tax and spend redistributionist approach that would if enacted be sure to weaken the economy in the short run and in the long run, reducing wage growth for those America’s families about whom he expresses concern.

The plan includes lots of nits and gnats proposals that would do little more than add complexity to the tax code – essentially an anti-tax reform bill for the little guy.  It also includes three central proposals, the first of which is a $1,000 tax credit against taxes on wage income.  As the tax code already has an Earned Income Tax Credit providing tax relief to working families, this should be dubbed the Sinatra provision because it’s only apparent motivation is to allow Mr. Van Hollen to croon “I did it my way”.

The Sinatra provision and the rest of the tax gnats are then paid for in part through the elimination of $150 billion of unspecified tax breaks for higher-income taxpayers. Sensible base broadening coupled with rate reduction is at the heart of comprehensive tax reform.  Mr. Van Hollen’s proposal would use up much or all of the available base broadening while leaving rates in place – essentially anti-tax reform for the affluent.  

The rest of his plan is paid for through a sales tax on financial transactions, which should be dubbed the middle-class pension tax.  Mr. Van Hollen states specifically that his plan was intended to increase the progressivity of the overall tax system, but in this case he misfired badly.  The fact is most upper-income investors will move their transactions  overseas to avoid the tax while the hit will be felt by  middle-class retirement funds as well as all the defined benefit pension funds of teachers and police and firemen and the like.  Do the unions know about this? 

Analysts and politicians are usually in agreement about the need for American families to up their retirement saving.  Indeed, one tax policy gnat in the Van Hollen proposal is to give a $250 deduction for depositing $500 into a tax-preferred saving account.  Yet most of the tax revenue that would derive from the Van Hollen financial transactions sales tax would come right out of those very same middle-class savers.  Yet again, anti-tax reform in action.

In one sense, one can sympathize with Mr. Van Hollen and those who share his views as they seek to navigate the next couple of years.  The economic recovery continues, but under the weight of Obama’s policies shows little sign of accelerating noticeably in 2015.  The American people rendered a damning judgment on these policies in the last two elections.  And the policy cupboard offering alternatives to those who share Mr. Van Hollen’s views is utterly bare.  With no other option, doubling down on bad policies is one supposes, if nothing else, something to do.  

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About the Author

About the Author

Former Senior Vice President, Economic Policy Division, and Former Chief Economist

Dr. J.D. Foster is the former senior vice president, Economic Policy Division, and former chief economist at the U.S. Chamber of Commerce. He explores and explains developments in the U.S. and global economies.