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A Good Start on Tax Reform


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It is a testament to the scale and absurdity of the U.S. tax code that it takes a 979-page bill to reform and simplify it. That’s how much paper Representative Dave Camp’s proposal, from the House Ways and Means Committee, uses to reduce marginal rates for businesses and individuals, limit tax deductions and exclusions, and simplify the system overall. And a great deal of the proposal is good.

It’s hard to object, for instance, to the 89 sections of the bill devoted just to removing “deadwood” (provisions that no longer affect taxes paid) from the tax code. We can’t count the number of distortionary or costly active provisions in the individual and corporate income-tax codes that Camp’s bill eliminates. Of course, each of these changes will attract opposition from somewhere, but such is the price of tax reform.

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What are the benefits? It would cut the top corporate tax rate, one of the highest in the world, to 25 percent, while the top individual-income rate would fall to 35 percent. It would reduce the complexity of the code significantly — allowing 95 percent of Americans to take just the standard deduction — while maintaining similar levels of revenue and encouraging business investment. In other words, we can reliably expect to move in the right direction along the Laffer curve. (Simplifying the tax code also reduces the incentives and opportunities for mischief by tax collectors, and Camp’s bill includes further measures to insulate taxpayers from political abuse by the IRS.)

Across income levels, Camp’s proposal is essentially neutral: Incentives are improved without giving Democrats any chance to wail about tax cuts for the rich. Of course, some will pay more and some will pay less. The bill’s redistribution is largely from single Americans to families, and from firms that have won special advantages in the tax code to those that have typically seen high tax bills. Both of these are, besides any considerations of fairness, good economic policy.

The individual-income tax becomes simpler, with fewer brackets, and incorporates a larger child credit. A number of the specific proposals for base-broadening are quite welcome: The mortgage-interest deduction that distorts real-estate decisions will be capped, and the state-and-local‎-tax deduction that subsidizes profligate states and municipalities is gone.

Camp would fundamentally change the earned-income tax credit, an important program riven by appalling rates of fraud and improper payments: It would become a tax credit that reduces payroll taxes, which poor Americans still pay. That’s a sensible measure (and it will reduce the marriage penalties in the program), but it also reduces the generosity of a program that should, if anything, be larger. Marriage penalties ought to be eliminated wholesale, something Senator Mike Lee’s outline for tax reform adopts as a goal but Camp does not attempt.

There are some provisions that introduce needless complexity: There’s no reason to slap a 25 percent excise tax on nonprofit executives with high salaries, for instance. (Harvard University should get to decide how to govern itself — although, per WFB, nothing else.) The tax code’s treatment of charitable deductions needs to be reformed, but Camp’s proposal doesn’t get it right: Senator Lee’s proposed outline included a flat credit available to all taxpayers, while Camp allows deductions only for donations that exceed 2 percent of income, while reducing the benefit for high-income earners. The latter is desirable, the former isn’t.

The bill also slows the rate at which corporations are allowed to claim tax deductions for depreciating their investments, a change that will raise tax revenues. But when combined with a lower corporate tax rate, this will privilege existing investments over new ones — not quite as much of a concern in an improving economy, but an undesirable and unfair measure nonetheless.

Camp has one idea that’s intended to accomplish a policy goal and raise some revenue: a tax on the assets of the largest financial institutions (those holding over $500 billion, a threshold that would increase as the economy grows). It would raise $86 billion over the next ten years. While defenders of this provision note that banks have more to gain from Camp’s proposal than other businesses because they pay high effective tax rates today, that’s what happens when you cut rates on everyone: Those who pay close to the top statutory rate and get the fewest deductions now will get the biggest benefits. While the factors pushing the consolidation of the American financial system into ever larger, sometimes riskier, institutions should be addressed, this tax may not be the way to do it.

Another notable source of revenue is the transition from using the standard consumer price index to “chained CPI” in calculating tax brackets each year. Chained CPI, which grows more slowly than the existing CPI, may well be a more accurate measure of inflation. But it’s a step away from the right way to index tax brackets: basing them on what’s being taxed — wages or income, which grow faster than inflation.

Camp’s bill isn’t perfect, but it’s much better than the status quo — and an apt complement to the wave of new policy ideas coming from congressional Republicans of late. His work is another proposal that should force Democrats to explain why they oppose efforts that simplify government, boost the economy, and help middle-class families.

According to the Joint Committee on Taxation, under Camp’s proposal, the U.S. economy could be as much as 1.6 percent bigger in 2023 than it would be otherwise. That may not sound like much, but it would add $400 billion to the American economy without altering the fiscal position of the federal government, while creating 2 million jobs along the way. Critics should remember that this is what counts, and Camp deserves credit for being the man in the arena.



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