Would Republican tax reform make the rich richer, like Romney plan? (+video)

Rep. Dave Camp (R) has a proposal to simplify the US tax code without reducing the share of overall taxes paid by the rich. That can be hard to do, as Mitt Romney found out.

By , Staff writer

American Action Forum Director of Fiscal Policy Gordon Grey and Tax Foundation Chief Economist William McBride discuss Rep. Dave Camp’s tax code overhaul plan and the possibility of the plan getting through congress.

Among the challenges facing Dave Camp as he seeks to sell Congress on major tax reform is this: It can be hard to cut tax rates and simplify the code without also cutting taxes on the rich.

Many Americans see this as a basic test of fairness in tax reform – and in 2012 Republican presidential nominee Mitt Romney got into a statistical briar patch on precisely this point.

Mr. Camp, the Republican lawmaker who chairs the House Ways and Means Committee, has acknowledged the challenge and tried to address it up front. Where economists debated endlessly over whether Mr. Romney’s math added up, Camp said Wednesday that his plan has been scored by congressional-staff economists as “distributionally neutral.”

Recommended: Are the rich getting richer? Take our quiz on inequality and incomes.

That is, each income group would still pay its current share of America’s overall income taxes, even as the top official tax rate would fall from 39.6 percent to 25 percent.

Of course, some Americans would like to see the rich pay a higher share of taxes, not the same share. But Camp’s proposal has at least been certified by one group, the staff of Congress’s Joint Committee on Taxation, as not moving in the opposite direction. Romney tried to follow the same “neutral” premise in a plan to lower tax rates and streamline the code, but failed to persuade many economists that his plan could work.

If the Joint Committee analysis is correct, then the Camp plan wouldn't favor the rich in the sense of lowering their share of overall taxes. But it might still allow them to get richer compared with the status quo. That's because the proposal is designed to make the whole economy grow faster – making Americans'  incomes higher in general than they'd otherwise be. Judging by trends seen in recent decades, high-income Americans might reap a disproportionate share of these overall gains.

Political prognosticators say Camp’s plan won’t pass Congress, especially in an election year when both sides are more focused on scoring points against each other than in compromising on difficult issues. But prominent members of both parties have avowed the need for major tax reform, and Camp’s proposal is at least a potential conversation-starter among lawmakers.

That’s because it’s a flesh-and-blood example of how tax reform might work, with ripple-out benefits for economic growth. The proposal is much more detailed than Romney’s was. And, although it may not feel fully satisfying to either Democrats or to Camp’s fellow Republicans, the plan does point the way toward the kinds of tough choices that may ultimately be needed to get a reform passed.

Camp said polls show the American people on the side of simplifying the tax code, and that more broadly Americans are concerned about unemployment and stagnant incomes.

“What they really want and what this plan delivers is a stronger economy,” Camp said Wednesday at a briefing.

By the Joint Committee estimates, his proposed streamlining of tax rules would improve the US business climate, resulting in an economy with 2 million more jobs and a 20 percent larger size a decade from now.

On the issue of fairness, something always in the eye of the beholder, Camp acknowledges that even a plan that’s neutral among key income groups will have winners and losers.

The premise behind reform – whether Camp’s plan or others – is typically that by simplifying the tax code and lowering tax rates for both individuals and businesses, the economy will function more efficiently, with decisions less distorted by tax-code oddities. Businesses from abroad, too, will be more likely to invest in the US. The result will be faster economic growth.

During the 2012 election campaign, President Obama and challenger Romney each embraced to some degree the idea of cutting tax rates while ensuring enough federal revenue by eliminating tax loopholes and deductions that reduce taxable income. The two candidates differed on details such as how much revenue the government needs, and how much burden the wealthy should bear.

Camp’s proposal follows the same philosophy of lowering rates while broadening the “base” of income subject to taxation.

To get the tax-reform discussion going, he proposes moving from seven brackets in the individual income tax down to two, with most incomes taxed at 10 percent and high incomes taxed at 25 percent. The corporate income tax would fall from 35 percent to 25 percent.

How do you do this while still drawing in the same amount of tax revenue as today’s code (Camp’s goal) and not letting the rich get a new tax break? One answer is to close loopholes in a targeted way, and to impose extra taxes on many high-income earners. The Camp plan would phase out the deduction for mortgage interest for the priciest 5 percent of US homes, for instance. And it would impose an extra 10 percent surtax on incomes above about $400,000.

The proposal also would impose a new excise tax on the biggest banks. And it would require hedge fund managers and private equity firms to treat a common form of their compensation called “carried interest” compensation as ordinary income, rather than as capital gain.

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