Republicans Try to Change the Tax Debate on Paying a 'Fair Share'

On tax reform, Senate Republicans are trying to highlight how much the rich pay and how little the bottom 50 percent pay.

Sen. Orrin Hatch, R-Utah. (National Journal)

As the debate on tax reform continues, one of the largest divides between Democrats and Republicans is the definition of tax fairness and who is paying their fair share.

While Democrats have tried to frame the argument about the wealthy paying their "fair share," Republican Finance Committee Chairman Orrin Hatch offered a different definition at a hearing about fairness on Tuesday.

Hatch said that a fair tax code would be one that treats people in similar situations the same way, and that the government should not "pick winners and losers." But Hatch also said that the tax code should be progressive enough to account for people's ability to pay, and that Americans should make contributions to the services they benefit from.

"The current situation—where nearly half the country is effectively shielded from the cost of funding the federal government—deserves some attention in tax reform," Hatch said in his opening statement.

Hatch's statements were quite similar to ones made in the 2012 presidential campaign by Mitt Romney about 47 percent of Americans paying no income tax, although Hatch's comments didn't explicitly get into the politics of that group.

Hatch's remarks were indicative of a larger debate about tax reform and fairness. The senator farom Utah has previously said that a principle of tax fairness would be be reducing tax expenditures to "broaden the tax base" while simultaneously lowering tax rates.

Meanwhile, the Obama administration and Democrats see fairness as closing loopholes that benefit the wealthy and large corporations, and increasing rates on capital gains taxes for high-income earners.

One of the panelists at Tuesday's hearing, Deroy Murdock, a journalist and Fox News contributor, pointed to data from 2012 showing that the top 1 percent paid more than 38 percent of all income taxes in the U.S., despite earning only 21 percent of all income. The bottom 50 percent paid less than 3 percent of all taxes, despite earning 11 percent.

The numbers appear to come from a 2014 study from the right-leaning Tax Foundation that evaluated IRS data on individual income taxes for 2012.

"So, rather than berate top income earners, we should thank them for paying more than their fair share to keep Washington so generously funded," Murdock said in his testimony, and he used this point to advocate for a universal flat income tax of 10 percent.

"Rather than obsess over how to squeeze, humiliate, and punish the wealthy, let's focus on how to lift the incomes of those at the opposite end of the income distribution," he said.

But Democratic Sen. Ron Wyden, the committee's ranking member, pointed out this data is based on only certain taxes.

"It focuses on Americans of modest means who aren't hit by the income tax," he said. Wyden used the example of veterans who have difficulty finding work and often do not pay income taxes—and when they do find work, they still have to pay payroll taxes.

"One of the tenets of the income tax has always been that it's paid by people who can afford it," Wyden said.

Wyden also released a report on Tuesday showing the ways some taxpayers use various strategies to avoid paying capital gains taxes or to time the recognition of capital income, as well as how derivatives can be used to convert ordinary income into capital gains and how to convert capital losses into ordinary losses. Wyden's study also showed how income taxes could be avoided by deferring compensation.