Republican tax overhaul would come at cost of hundreds of credits, deductions


Representative David Camp (R-Mich.), the top Republican tax-writer in Congress, proposed restructuring the U.S. tax code to eliminate dozens of breaks to pay for reductions in the corporate and individual rates. (Andrew Harrer/Bloomberg)

The Republican chairman of the tax-writing House Ways and Means Committee proposed a bold but politically hazardous overhaul of the nation’s tax laws Wednesday that would jettison hundreds of popular tax breaks in favor of a simpler code with lower rates.

The plan drafted by Rep. Dave Camp (R-Mich.) would significantly reduce rates for individuals and corporations, pushing the top corporate rate down to 25 percent, from 35 percent, and the top individual rate down to 35 percent, from 39.6 percent.

Tax-filing season also would be much easier for most households under the proposal, with an estimated 95 percent of filers likely to claim a new, expanded standard deduction and call it a day.

However, all that simplicity would come at the cost of hundreds of credits and deductions that have been woven deeply into the fabric of American life. There would be no more personal exemptions for you, your spouse and your dependents; no more credits for child care; no more deductions for medical bills or for state and local taxes.

The mortgage-interest deduction would be available only for mortgages worth less than $500,000 instead of the current $1 million (although currently held mortgages would be grandfathered in). And an important tax break for the poor known as the Earned Income Tax Credit would be sharply scaled back.

Investment income would lose its special status and be taxed as regular earnings (although the first 40 percent would be exempt). And the plan would cut in half the amount of money most people can put away tax-free for retirement, forcing additional savings into Roth IRAs, where contributions are subject to immediate taxation.

During a Capitol Hill news conference, Camp said the nonpartisan Joint Committee on Taxation had determined that the proposal would boost economic growth over the next decade, generating $700 billion in new revenue for the government and creating nearly 2 million jobs. Tax analysts predicted that the ambitious package would jump-start a serious discussion about the merits of tax reform.

But as the screaming started among industry lobbyists, Camp’s prospects for passing any part of his plan before he gives up his chairmanship early next year were dismissed as exceedingly dim.

“It was always the view that you couldn’t [meet Camp’s target for lower rates] without having blood in the streets,” said Dean Zerbe, a longtime tax aide to Senate Republicans who now serves as national managing director for the Alliant Group. “Well, they’ve proven that: They’ve just gotten rid of everything.”

Even before Camp released his plan, Senate Minority Leader Mitch McConnell (R-Ky.) told reporters Tuesday that he has “no hope” that a tax overhaul could make it through Congress this year. On Wednesday, House Speaker John A. Boehner (R-Ohio) was equally blunt.

“Blah, blah, blah, blah,” he said when asked about the details of Camp’s proposal, calling it just “the beginning of the conversation.”

“The idea of tax reform is to get our economy going again, provide better, more economic growth, more jobs and higher wages. The way you do that is you bring down rates. And to bring down rates, you clean out a lot of the garbage that’s in there and the special interest issues that are in it,” Boehner said. “I think we ought to have a real conversation and this is the beginning of that conversation.”

Still, it’s a dangerous conversation to have just eight months before a midterm election, and Boehner has made no promises that Camp’s plan will advance in the House.

Camp did not predict when his committee might consider the proposal. The next step, he said, will be a bipartisan briefing Thursday for committee members, as well as tax experts from the Treasury Department.

Asked about the cool reception — as well as the prevailing sense that neither party has much interest in pursuing significant legislation this year — Camp defended his decision to move forward with a tax package that has been in the works for nearly three years.

“I think we need to be the party of growth, of opportunity, of restoring the American Dream,” he said. “Look, we have an obligation to debate the big issues of the day.”

Republicans have long ranked lower tax rates at the top of their list of legislative priorities. If lawmakers were willing to clear out a profusion of tax breaks for “special interests,” they have argued, then cutting rates could be achieved without increasing the deficit.

Camp has proved that argument fundamentally correct. Under his proposal, tax collections would remain relatively steady, while most taxpayers would see little change in their overall bills. Aides said most middle-class households would receive a small tax cut.

But Camp’s proposal also blows apart the idea that tax breaks benefit only big business and special interests. Even though his reforms would collect more than $500 billion in additional taxes from corporations over the next decade — including “deemed repatriation” of profits accumulated abroad and a new tax on financial transactions — individual taxpayers still would have to give up a host of popular benefits to cover the cost of lowering rates.

The wealthiest 1 percent of households, those earning more than $450,000 a year, would be hit particularly hard in that regard, a somewhat surprising development in a Republican proposal.

Although 99 percent of filers would pay a rate of 25 percent or less, top earners would face a 10 percent surtax on annual earnings over $450,000 — which GOP tax aides conceded Wednesday essentially amounts to a new 35 percent bracket.

In addition, Camp’s plan borrows an Obama administration idea: limiting the value of virtually every exemption, deduction and credit for those households to 25 percent. Even employer-provided health insurance would be taxed as regular income for those households, while the rest of the nation would continue to receive employer-paid health benefits tax-free.

Asked about the surtax, Camp said he was determined to make sure that his tax plan did not provide a big tax cut for the wealthy, as Obama and other Democrats insisted it would.

“There is not going to be a tax cut at the top end,” he said.

Democrats’ response to the proposal was muted and largely respectful. But the tactical disadvantages were quickly apparent of releasing a package of proposals to repeal various tax breaks at a time when Democrats are insisting on collecting additional revenue from the wealthy.

“While I applaud Chairman Camp for releasing this tax reform plan today, I am disappointed to see that, once again, House Republicans refuse to ask the wealthiest Americans and biggest corporations to contribute to reducing the deficit,” Senate Budget Committee Chairman Patty Murray (D-Wash.) said in a statement.

She added that she looks forward to working with Republicans to implement some of Camp’s “good ideas . . . for closing unfair tax loopholes.”

Lori Montgomery covers U.S. economic policy and the federal budget, focusing on efforts to tame the national debt.
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