For years, Democrats and Republicans have been urging an overhaul of the US tax code, and now, the first shoe has dropped. For the first time in 25 years, a top-to-bottom overhaul of America’s complex tax system has been drafted in Congress – outlining a much simpler system that would allow 95 percent of filers to get the lowest tax rate (10 percent) without having to itemize or track receipts.
The reform plan was released Wednesday by Rep. Dave Camp (R) of Michigan, chairman of the tax-writing House Ways and Means Committee. It caps three years of work on tax reform, some of it with Democrats. While it is almost universally accepted in Washington that this proposal won’t become law this year, if ever (read on to see one intriguing possibility of how it could advance), people on both sides of the aisle, as well as observers, describe the Camp plan as a welcome starting point for a serious debate on tax reform.
“In general terms, it’s a pretty risky exercise” to make public something this detailed where it can be shot at in an election year, says Joseph Minarik, chief economist in the White House Office of Management and Budget during the Clinton administration. On the other hand, he said, “you can start a debate, you can put an idea out there that will begin to become a magnet for further ideas and discussion.” That was what happened in the run-up to America’s last big tax reform under President Reagan in 1986, he said.
Here are key elements of the Camp plan:
- The plan collapses the current seven individual tax brackets to two: a 10 percent tax rate and a 25 percent tax rate – a significant drop from today’s top rate of 39.6 percent.
- A new 10 percent “surtax” would be levied against incomes of the wealthiest earners.
- The corporate tax rate would be cut to 25 percent, down from 35 percent.
- The standard deduction and child tax credits would be increased, while 40 percent of long-term capital gains and dividends would be exempt from tax – the rest taxed as ordinary income.
Other deductions, exemptions, and credits would be trimmed to help pay for the simpler system, whose “guiding principle is that everyone should play by the same rules,” as Mr. Camp put it Wednesday.
Overall, the Camp tax reform proposal remains progressive – with the rich bearing a greater burden than the less well-off. And it generally maintains the current distribution of the tax burden among the wealthy and poor. It is also deficit neutral, according to the nonpartisan, congressional Joint Committee on Taxation – neither adding to nor reducing the deficit. The Joint Committee also says the reform would spur 1.8 million new private-sector jobs and grow the economy by about 20 percent over 10 years.
As benign as this plan may sound to some Americans, “tax reform is always tough because every tax preference has a constituency that will fight for its survival,” says John Pitney, an expert on Congress who teaches at Claremont McKenna College in Claremont, Calif.
Many of Camp’s Republican colleagues worry about opening this can of worms unnecessarily during an election year and angering their business constituencies, some of which, such as big banks, would take a financial hit. Democrats object that Camp’s plan does not include any additional revenue to reduce the deficit, and that it does not extend the Earned Income Tax Credit, which helps the poor.
Yet the Camp plan is viewed as a serious piece of draft legislation. While it might not bear the official “bipartisan” label, it bears the signs of work across party lines, such as closing the tax loophole for corporate jets, which President Obama has long advocated, and dedicating funds to infrastructure. Camp consulted with former Senate Finance Committee chairman Max Baucus (D) of Montana, before he left to become the US ambassador to China, and he launched 11 bipartisan tax reform working groups with Ways and Means ranking member Rep. Sander Levin (D) of Michigan.
Broadly speaking, both parties “can coalesce around the reduction in corporate and individual tax rates. That’s the golden chalice that they’ve been chasing for years,” says Steve Bell, former staff director of the Senate Budget Committee and now at the Bipartisan Policy Center think tank in Washington.
Another principle that can bring the parties together: fewer tax preferences for certain industries and groups, adds Mr. Minarik.
Analysts point to several policy kernels that both parties could digest: for example, curbing tax deductions at the high end. The plan calls for reducing the cap on allowable home mortgage interest from a principal of $1 million down to $500,000. That satisfies on many levels: preserving this cherished tax break; reducing it to help pay for a simpler tax system; and making it progressive – so that the wealthy bear a greater burden. The plan also adopts recommendations from the bipartisan working groups to consolidate a series of complex education tax benefits so that families can more easily afford college.
Camp and others point to the urgent need for tax reform as an economic driver, as a way to keep America competitive in the world, and to cut the complexity (he calls it “the junk”) of the system itself.
He’s a driven lawmaker, not to be underestimated. Some speculate that after this fall’s midterm elections, Camp may team with the new Senate finance chair, Ron Wyden (D) of Oregon, and use the looming expiration of more than 50 tax provisions as leverage to pass tax reform in a lame-duck Congress.
That would be a bold move. Just as it was for Camp to stand alone on Wednesday to present his plan to the media – with no one from his committee at his side, and none of the Republican leaders there to support him. Even he had to acknowledge, the plan is “a discussion draft.”
The discussion could go on for years.