Rep. Dave Camp (R-Mich.) got kudos from many sides on his tax reform effort. His plan contains only two brackets (10 and 25 percent), but with a “surcharge” on upper-income earners. He scrubs the corporate tax code and lowers the top rate to 25 percent. Democrats and Republicans complimented him for eliminating some duplicate and narrow deductions, exemptions and credits to make the code “flatter.” He maintains revenue neutrality and does not shift the tax burden to the less well-off.
Democrats seem to have accepted (so far) at face value the dynamic scoring that shows the bill would increase income, growth and tax revenue. As the Wall Street Journal editorial board explains, “Statically speaking, the Camp plan is revenue- and distributional-neutral, but dynamically, Joint Tax estimates it will throw off $700 billion in higher receipts over a decade. If Mr. Obama is shrewder than usual, he’ll pocket these dollars, call the Camp plan a tax increase on the rich to placate the left and bask in the political glow of more prosperity.”
The provision allowing 95 percent of taxpayers to avoid itemization and instead file a simple one-page form with a generous standard deduction ($11,000 for singles, double for married couples) got applause as well.
Democrats obviously don’t like his repeal of Obamacare taxes; they want a tax hike and even more onerous taxes on capital. This, by the way, is what the country would get if the Dems controlled the White House and both houses of Congress. (It would be interesting to see the scoring on what that would do to growth and employment.)
On the GOP side, Camp, to many observers’ surprise, went populist. He socked it to the financial industry on carried interest, added a bank tax, extended the period for depreciation and raised the top marginal statutory rate on capital gains (without Obamacare taxes) from 23.8 to 24.8. Camp’s office disputes this, using a marginal “effective rate” calculation that has not convinced anti-tax and pro-investment advocates.
Americans for Tax Reform (which cited many praiseworthy aspects of the bill) argued in a summary: “As a result of tax increases on capital gains and dividends, and tax increases on business investment, the [Joint Committee on Taxation] dynamic score assumes that business capital will shrink. This is highly problematic, since capital is the seed corn of future economic growth. It’s true that labor force and consumption growth is big enough to overwhelm this effect at least in the shorter run, but no tax reform plan should be increasing the taxation of capital. This was a big mistake from the 1986 Tax Reform Act, and it’s a big mistake here.”
On the plus side, conservatives like the reduced corporate tax rates, a move toward territoriality (which would encourage repatriation of overseas profits) and repeal of the alternative minimum tax. Some fiscal conservatives also cite the lower cap on mortgage interest deduction ($875,000 for debt incurred in 2015, $750,000 for debt incurred in 2016, $625,000 for debt incurred in 2017, and $500,000 for debt incurred thereafter”) as a bold and necessary move. Jim Pethokoukis explains: “The [mortgage-interest deduction] is a $70-billion-a-year, market distorting subsidy for the purchase of expensive homes by high-income taxpayers. It does little to promote homeownership by Americans of more modest means. There is no sound economic reason to use the tax code to artificially advantage the higher-end real estate sector over other sectors of the economy.”
If, as conservatives want, you let up on capital gains taxes the money will have to come from somewhere else unless, at least on paper, the parties will accept a reduction in revenue.
From a purely political standpoint, the effort is ingenious. The GOP can be seen as taking on big banks, protecting small businesses and encouraging growth. If Wall Street is somewhat dismayed, Republicans can attack opponents of reform as defenders of Big Business. As an election document, it is enticing.
Can some version of this pass? Well, there is the rub and why tax reform is so hard. Winners create losers and every time one takes a special perk away one segment of the business or political community squawks. It is not clear that there is some magic compromise that will leave everyone happy “enough,” even on the GOP side. But at least the Republicans have something that is generally consistent with their economic philosophy and political messages. It rebuts the notion that GOP tax reform is about hurting the “little guy” or starving the government of revenue. It shows a flatter code can be revenue neutral. That’s not nothing.