WASHINGTON – U.S. Senator Ben Cardin (D-Md.), a senior member of the Senate Finance Committee, this week reintroduced progressive, forward-looking legislation that would eliminate income tax liability for many Americans, changes the way the federal government collects revenue and make tax code better for working families.
Rather than taxing most income, Senator Cardin’s bill, S. 5031 the Progressive Consumption Tax Act (PCTA) of 2020, generates reasonable revenue by taxing the purchase of goods and services. Designed to be at least as progressive as the current tax system, low- and middle-income families would be protected from unfair consumption taxation through rebates 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 this system to set reasonable limits on the amount of income generated by the new progressive consumption tax.
Since the original introduction of the Progressive Consumption Tax Act in 2014, many policymakers and stakeholders have become increasingly interested in thinking creatively about the tax code and providing tax relief for working families. Further, the 2017 tax debate showed how hard it is to simplify the tax system and lower tax rates to provide stable, progressive and fiscally-responsible tax reform.
“We need a tax code that is fair for American families and for employers. We need a tax code rethinks how our country collects the revenue that allows us to build our roads and bridges and keep or nation safe. We need a system that values our most vulnerable Americans, small businesses, and makes our U.S.-based businesses more competitive,” said Senator Cardin. “Now more than ever, we need to take a hard look at the way this country collects revenue and administers the tax code. Our tax code should be equitable for working families and small businesses. It should be pro-growth and responsibly collect reasonable revenues. The tax code post-1986 was outdated, and the 2017 effort showed how hard it is to broaden the tax base and provide permanent income tax relief for families.
“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 level 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 revenues generated under this new regime would give lasting income tax relief for most households,” Cardin continued. 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 to ensure it keeps up with a changing economy.
For taxpayers who would have an income tax liability under this system, they would have lower income tax rates than under current law. The top marginal individual income tax rate would be 28 percent versus the current top marginal rate of 37 percent under current law. Important tax benefits remain: (1) the charitable contribution deduction; (2) the state and local tax deduction; (3) health and retirement benefits; and (4) the mortgage interest deduction.
In addition, the corporate would be cut from 21 percent to 17 percent. This would make U.S.-based businesses more competitive on a global scale.
“A guiding principle of this legislation is to make the tax code progressive while catching the U.S. up with the rest of the world. To maintain progressivity under this new system, rebates 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 (EITC) and Child Tax Credit (CTC). 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. The current OECD average for consumption taxes is about 19 percent.
The updated Progressive Consumption Tax Act contains several refinements based on stakeholder input received since 2014 and to reflect changes made to the tax code in the 2017 tax law.