In a curious way, the sweeping “tax reform” plan unveiled recently by Rep. Dave Camp, the Republican chairman of the House Ways and Means Committee, demonstrates why half measures won’t do. The income tax has become, through its many deductions, credits and exclusions, a citadel of political power by which Congress and the White House reward and punish various groups and causes. Unless we break decisively with this system, it will survive even energetic efforts at streamlining. That’s what Camp offers, and I don’t think it’s enough.
He would convert seven tax rates (from 10 percent to 39.6 percent) into three: 10 percent, 25 percent and 35 percent. To finance these reductions, some tax breaks would be curbed. The deduction for state and local taxes would go. The home-mortgage interest rate deduction would be reduced by limiting its eligibility to loans up to $500,000, down from $1 million now. (Existing mortgages would be grandfathered.) Charitable deductions would apply only to contributions exceeding 2 percent of taxpayers’ adjusted gross income.
Camp’s plan would represent an improvement. The share of taxpayers who itemize would drop from roughly one-third to about 5 percent. This would be a huge gain in simplification. (To encourage this shift, the plan would increase the standard deduction from 2013’s $12,200 for a couple to $22,000.) Still, Camp’s tax system would resemble today’s. It would be complex and have high rates. The surviving mortgage and charitable deductions are examples of enduring complexity.
By design, Camp’s plan matches today’s tax burden on the rich, middle class and poor. It also roughly duplicates the amount of revenue raised. These goals could be achieved with lower rates — say, a top rate of 25 percent — but that would require dramatic base broadening, including, I think, at least the following: eliminating all mortgage interest rate and charitable deductions; taxing employer-provided health insurance; and ending preferential rates on capital gains (profits on the sale of stocks and other assets).
Proposing this, it’s said, would be political suicide. I dissent. Camp has already antagonized powerful groups by endorsing cuts in existing preferences. Homebuilders and realtors will resist limits on the mortgage interest rate deduction. Churches, colleges and other nonprofits will denounce tightening the charitable deduction. I doubt the opposition would be much stronger if Camp urged complete repeal of these tax breaks.
If you’re going to fight this battle, you might as well seize the moral high ground by taking a stand on principle. What’s at issue is the nature of the tax system. Do we want a relatively simple system that raises the government’s revenues as efficiently as possible while minimizing interference with the economy and private decisions by households and firms? Or do we want a system that empowers Congress to micromanage the economy and turns tax breaks — often ineffective — into political handouts?
Someone has to make the case for simplicity and restraint because most politicians embrace complexity and empowerment. We’ve been here before. Under the Tax Reform Act of 1986, tax breaks were eliminated and the top rate lowered from 50 percent to 28 percent. The legislation was bipartisan, supported by President Reagan and congressional members of both parties. But President Clinton sabotaged this system by successfully championing a top rate of 39.6 percent and backing new tax breaks. President Obama follows the same script: higher rates, more breaks.
Of course, the choice isn’t either/or. Although I favor a simpler system, I would retain a few major preferences that support overriding national goals. One would be the earned-income tax credit (EITC), which serves as a wage subsidy for low-income workers. Making work more attractive to the low-skilled is in everyone’s interest. Another would be tax preferences for contributions to retirement accounts. Without this lure, millions of Americans wouldn’t save for their later years.
But our system is a far cry from this bare-bones approach. There are tax breaks for electric cars, college tuition, adoption, moving expenses and energy efficiency, among others. And, of course, businesses enjoy many tax breaks (the subject of a future column). Some preferences promote worthy causes, but collectively they impose a sizable cost, as more time and expense go to unproductive tax planning, compliance and lobbying.
Tax preferences are so embedded in the nation’s political, economic and social fabric that, under any circumstances, passing even the mild Camp plan would face long odds. Politicians won’t meekly surrender this form of power. Nor will recipient constituencies spontaneously cede their advantages. Still, the odds could be shortened if we were bolder and had to muster public support for a genuine overhaul, not just a tinkering.
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