December 09, 2016

As Tax Reform Talks Loom in 2017, Cardin Reintroduces a Comprehensive, Progressive, Pro-Growth Approach

WASHINGTON – U.S. Senator Ben Cardin (D-Md.), a member of the Senate Finance Committee, has reintroduced groundbreaking legislation that would eliminate income tax liability for most Americans and reduce corporate income tax rate to one of the lowest among industrialized nations.

Cardin’s bill, S. 3529, the Progressive Consumption Tax Act (PCTA), changes the way the federal government raises revenue. Rather than taxing income, the Progressive Consumption Tax (PCT) generates reasonable revenue by taxing the purchase of goods and services. Designed to be at least as progressive as today’s tax system, low- and middle-income families would be protected from unfair consumption taxation through a rebate, and important benefits would be retained in a much simpler income tax code. A revenue circuit breaker, tied to Gross Domestic Product (GDP), is built into the Cardin system to set reasonable limits on the amount of income generated by the new progressive consumption tax.

The text of S. 3529 can be found here. More details are available at cardin.senate.gov/pct.

Since the original introduction of the Progressive Consumption Tax Act in 2014, many policymakers, including in Congress, have become increasingly interested in moving to a border-adjustable consumption tax base.

“Our tax code should be fair for families and employers. It should help make American-based businesses more competitive and our Nation’s economy stronger. And it should provide a way to responsibly and reliably collect reasonable revenues. Our current, 1980s-style tax code simply cannot accomplish these goals,” said Senator Cardin.

“Credible tax reform is critical to America’s economic competitiveness. Every other developed country in the world, including all other Organisation for Economic Cooperation and Development (OECD) countries, have a consumption tax. The Progressive Consumption Tax Act puts this country on a competitive playing field with other nations by providing for a broad-based progressive consumption tax, or PCT, at a rate of 10 percent. The PCT would generate revenue by taxing goods and services, rather than income.

“The PCT is not simply an add-on tax. The revenues generated by this new system would be used to eliminate an income tax liability for most American households,” said Senator Cardin. The PCTA’s income tax exemptions, called “family allowances,” are set at $100,000 for joint filers, $50,000 for single filers, and $75,000 for head of household filers. The family allowances are indexed for inflation.

Those who do still have an income tax liability would see a much simplified income tax with their marginal rates reduced—the top marginal individual income tax rate, applying to taxable income over $500,000 for joint filers, would be 28 percent versus the current top marginal rate (applying to taxable income over approximately $450,000 for joint filers) of 39.6 percent. Four important tax benefits remain: (1) the charitable contribution deduction; (2) the state and local tax deduction; (3) health and retirement benefits; (4) the mortgage interest deduction.

In addition, the bill would slice the corporate rate by more than half, to just 17 percent.

“A cornerstone of the Progressive Consumption Tax Act is its progressivity. Rebates and the family allowance will practically eliminate the consumption tax burden for lower- and moderate-income families and provide similar support as programs like the Earned Income Tax Credit and Child Tax Credit. Like the EITC and CTC, individuals and families who do not have an income tax liability would still be able to receive these rebates,” Senator Cardin added.

The Progressive Consumption Tax Act sets the PCT at a single rate of 10 percent. It is designed as a “credit invoice” method consumption tax that would be compliant with WTO rules. Since the U.S. is a low-tax country compared to other advanced-economy countries, the final PCT rate – if any change is made – will likely be set at a rate well below the current OECD average (about 19 percent).

The updated Progressive Consumption Tax Act contains several refinements based on stakeholder input received since 2014. It was reintroduced in the current Congress to provide an opportunity for further review and to show what responsible legislation that moves towards a consumption-base could look like as tax reform discussions move forward in 2017.