Opinion

Rep. David Camp's tax reform proposal has flaws, but is a step toward a more substantial debate

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Beltway Confidential,Opinion,Congress,Philip Klein,Taxes,Paul Ryan,John Boehner,Dave Camp

Rep. David Camp, R-Mich., who has jurisdiction over tax policy as chairman of the House Ways and Means Committee, on Wednesday unveiled a sweeping proposal to overhaul the tax code following years of work and 30 hearings. But before even publicly releasing the plan, tax reform was declared dead in the Senate for 2014, and Speaker John Boehner, R-Ohio, wouldn't even commit to a vote in the GOP-led House.

The fact that it doesn't stand a chance of becoming law anytime soon makes it easy to ignore a 979-page rewrite of federal tax law. But there are a number of reasons to pay attention.

To start, tax reform is a necessary project. As the executive summary of the proposal notes, since the last time the federal tax code was overhauled in 1986, it has grown from 26,000 pages to more than 70,000 pages, which represents more than 4,400 alterations. Aside from the time and money Americans spend preparing their taxes, the system is often rigged in favor of those with the most powerful lobbyists and most expensive lawyers and accountants. As designed, the tax code picks winners and losers and is an impediment to economic growth.

Though the proposal isn't going to be enacted in the near future in one piece, it's quite possible that several components could influence future policy, depending on who controls Congress and the White House after 2016. House Budget Committee Chairman Rep. Paul Ryan, R-Wis., who is likely to replace Camp once his chairmanship of Ways and Means expires at the end of the year, has already praised the proposal. Even if tax reform doesn't get done now, lawmakers have to start somewhere. And though I have a number of criticisms of its details, the plan should be viewed as serious effort to advance the cause of tax reform.

I should note at the outset that my own view of tax policy is simple but quite radical by today’s standards: I believe that the purpose of taxes is to raise revenue. Government shouldn’t use the tax code to manipulate human behavior to achieve goals deemed beneficial to society as a whole. On the spending side, advocates of limited government want to reduce expenditures to give individuals more control over their own money. This should be the same on the tax side. When politicians say “tax credit,” I hear, “We’ll allow you to keep more of your money if you spend it the way we think you should.”

Like many reform proposals, Camp’s plan aims to replace the current tax code with one that has fewer brackets and lower rates, which he offsets by closing a number of loopholes and deductions. Forging a more populist path than other Republican tax proposals, Camp’s reform targets big banks, hedge fund managers and corporate-jet owners. This could be an effort to help inoculate the proposal from the standard Democratic attacks on Republican tax reform plans as being a giveaway to the rich and powerful.

Specifically, the Camp plan would cut the number of brackets from the current seven to three – 10 percent, 25 percent, and 35 percent. It would also significantly raise the standard deduction to $11,000 for individuals and $22,000 for married couples filing jointly, which compares to $6,100 for single filers and $12,200 for married couples in the 2013 tax year. The Camp plan would also expand the per-child tax credit to $1,500 from $1,000.

As a result of these changes, the proposal estimates, 95 percent of taxpayers would be better off simply taking the standard deduction rather than itemizing various deductions. Based on analysis from the Joint Committee on Taxation, Camp estimates that “families with a median income ($51,000 for a family of four) will have on average an extra $1,300 in their pocket at the end of the year.”

The plan also reduces the corporate tax rate to 25 percent from 35 percent, permanently repeals the Alternative Minimum Tax, and scraps the medical device tax in President Obama’s health care law.

Camp’s proposal was evaluated by the Joint Committee on Taxation as being deficit-neutral, meaning that to offset all of these tax cuts, Camp had to find some places to raise revenue.

One of the most politically difficult areas that Camp deals with is to limit the mortgage interest deduction. In the name of encouraging home ownership, the mortgage interest deduction biases the tax code in favor of homeowners to the detriment of renters and those who cannot afford a down payment on a home. The deduction also reduced federal revenue by nearly $70 billion in 2013. But scrapping the benefit is difficult because current homeowners already counted on the deduction when they bought their homes and did their long-term financial planning. Swiftly eliminating the deduction would also presumably trigger a decline in housing prices in the short-term. To get around this problem, Camp’s proposal does not affect anybody with an existing mortgage and it doesn’t fully eliminate the deduction. Right now, the deduction can be used for up to $1 million in mortgage value, but under the plan, that would decline to $500,000 on new mortgages by 2018 and remain at that level. Given inflation, this means that over time, the deduction would become less and less valuable, especially to those buying more expensive homes.

Another provision in Camp’s proposal would eliminate the current deduction of state and local taxes, which currently means that taxpayers in high-tax jurisdictions such as New York and Massachusetts get subsidized by low-tax jurisdictions such as Texas and Florida.

The proposal would also change the treatment of charitable deductions, so that donations exceeding 2 percent of income would be deductible.

As noted earlier, the proposal also includes a number of populist tax polices, some of which have been previously advocated for by Democrats. For instance, the plan would change depreciation rules that have been used by owners of corporate jets; require investment firm managers to pay taxes on their share of the firms’ gains as if the money were regular income (as opposed to capital gains, which are taxed at a lower rate); and create an excise tax on banks deemed “too big to fail” by the 2010 Dodd-Frank financial regulatory law.

Overall, though the bill would represent progress, too much of it still accepts the premise that the federal tax code should be used by the government to promote certain national priorities rather than merely being a neutral way to raise revenue. There are other provisions that I'd take issue with, such as the one targeting investment firm managers (see this Avik Roy post for a good explanation of the issue).

Additionally, I would have liked to have seen Camp tackle payroll taxes, because for most Americans, this is the heavier burden than income taxes. They are also an incredibly economically destructive tax, because not only do they reduce spending power, but they make it more expensive for employers to hire new workers.

Camp did include a provision that replaces the Earned Income Tax Credit, which subsidizes low-income working Americans, with a tax deduction that can be applied against their payroll taxes in an effort to make the system more simple and less prone to fraud. But if Republicans really want to get around a reform that provides relief to low- and middle-income earners, a bolder focus on payroll tax reform is required.

In summary, Camp’s proposal isn’t going anywhere this year and has its flaws. But over the decades, the tax debate has devolved into a stale rhetorical shouting match in which Republicans propose uncreative tax cuts and Democrats counter by arguing for hiking taxes on wealthier Americans. The Camp proposal is a step toward a more substantial tax debate.

This story was first published on Feb. 26 at 8:09 p.m.

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