So What’s Not to Like in Dave Camp’s Tax Reform?

You’ll notice that I’ve been “accentuating the positive” with regard to Dave Camp’s new tax reform proposal. But it’s far from perfect. The following are a few of the questions and concerns that conservatives have been raising about Dave Camp’s Tax Reform Act of 2014 (TRA):

1. Though broadly supportive of Camp’s efforts, Yuval Levin and Ramesh Ponnuru raise a number of red flags, e.g.: (a) tax brackets are indexed to prices (chained CPI) rather than growth in incomes, as Andrew Biggs has proposed, and so “bracket creep” will produce substantial tax increases on middle-income households over time; and (b) though the TRA features an increase in the size of the child tax credit, this increase is not large enough to adequately address the the over-taxation of large families.

2. And though Ramesh applauds the TRA’s cuts in taxes on business investment, he warns that its approach to depreciation could screw things up. Ryan Ellis of Americans for Tax Reform is also critical of this feature of the TRA. (See Alan Viard on how a slow-down in depreciation deductions might mean “taking back with the left hand everything that the rate cut gives with the right hand.”) One of Camp’s GOP colleagues, California Rep. Devin Nunes, goes in the opposite direction by allowing 100 percent expensing of all business-related expenditures in his American Business Competitiveness tax reform proposal, and there is some indication that Nunes’s approach is gaining traction.

3. Ramesh also points to the fact that one of the TRA’s more substantively and politically interesting levies — its tax on banks with assets in excess of $500 billion — is a tax on assets rather than a tax on liabilities. Tim Worstall suggests that a tax on liabilities would likely prove a more effective way of reducing risk-taking on the part of “too-big-to-fail” (TBTF) banks, i.e., financial institutions that are so systemically important that they enjoy an implicit subsidy from the federal government. Those who lend to TBTF banks will charge them a lower interest rate because they are convinced that these banks enjoy a federal backstop; so one obvious step for the federal government to take would be to charge TBTF banks a market rate for what amounts to a federal insurance policy. It must be said, however, that in light of the political influence of major financial institutions, it is impressive that Camp went as far as he did, and one hopes that other Republican lawmakers will be willing to press ahead.

4. My populist sympathies incline me to think well of Camp’s commitment to treating carried interest as ordinary income, a commitment that could yield political dividends. Yet like Ramesh, I’ve become convinced that this is easier said than done. The problem lies in maintaining a distinction between “carried interest” in a hedge fund (controversial) and options in a corporation (uncontroversial) and “sweat equity” more broadly, as Jim Manzi explained in 2007.

5. Philip Klein argues that Camp ought to have been more willing to restructure the payroll tax burden.

6. And the Wall Street Journal editorial page believes that Camp didn’t go far enough in improving work incentives for high earners.

7. The centrist Committee for a Responsible Federal Budget points to the TRA’s reliance on one-time revenue sources and timing shifts as an indication that it might contribute to deficits in future decades; their general sense is that the proposal devotes too much of its base-broadening revenue to lowering rates rather than to financing public expenditures.

8. One of the issues I find most interesting, and one that’s been cited by several of my colleagues and comrades, is Camp’s decision to eliminate the state and local tax deduction. In theory, this will end the implicit subsidy of the residents of high-tax states by the residents of low-tax states, and it might also make the residents of high-tax states more attuned to the state and local tax burden. Another view is that in the absence of the state and local tax deduction, state and local governments might under-invest in the human capital of their residents, and this in turn will shrink the tax base in future years. Coupling the elimination of the state and local tax deduction with a substantial increase in the child tax credit is an excellent way to address this concern.

Overall, I’m impressed by how conservatives have responded to Camp’s efforts. Keep in mind that Camp has crafted a revenue-neutral reform in the wake of the so-called “fiscal cliff” and the advent of a wide array of Obamacare taxes, and by disregarding the likelihood that various “tax extenders” (notionally temporary tax provisions that are widely understood to be politically untouchable) will in fact be extended. Some conservatives maintain that Camp ought to have backed a revenue-negative reform, including Ellis of ATR. But that hasn’t really been the chief objection to the plan. Rather, the objections have been pretty astute, pretty constructive thoughts on how we might make GOP tax policy stronger on substantive and political grounds. The so-called “Stupid Party” has grown a brain.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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