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One Step Closer to Tax Reform

Thursday, February 27, 2014

House Ways and Means Committee Chairman Dave Camp’s tax reform proposal shows political courage and embraces admirable policy objectives.

Yesterday, House Ways and Means Committee Chairman Dave Camp (R-Michigan) unveiled the most sweeping, elaborate, and aggressive income tax reform proposal in a generation. His plan is the result of years of effort that have included bipartisan outreach, dozens of hearings, and thousands of hours of staff time. He deserves enormous credit for pursuing such a challenging task, especially considering the daunting politics and logistics involved.

Two years ago, I packaged together a set of proposed tax changes that I believed would be pro-growth, progressive, practical, and revenue-neutral. The idea was a reform that lowered the corporate tax rate, limited tax breaks for high-income individuals (the mortgage interest and state and local tax deductions), and repealed the Alternative Minimum Tax, among other adjustments. My plan, drawing on bipartisan suggestions that have existed in the tax reform world for a number of years, attempted to reduce the marginal tax on new business activities while broadening the tax base for those who can most afford it. The plan upset realtors, some firms who love debt financing, and the rich who feel overtaxed already. But others praised it for being specific, reducing unnecessary tax distortions, and lowering the tax on new investment. It was a small reform idea but my thesis was that Congress might not have the will to tackle the entire system.

By definition, tax reform alters the current tax landscape and creates winners and losers.

While my plan was an eight-page article, Camp’s reform comprises more than 900 pages of detailed legislative text. He cuts statutory tax rates for individuals and businesses and repeals scores of tax credits, deductions, and other preferences across the entire tax code. 

Of course, no one will love everything that Camp is proposing. By definition, tax reform alters the current tax landscape and creates winners and losers. Good tax reform creates more of the latter than the former, but it is not possible to fix the tax code without adversely affecting some taxpayers who enjoy today’s tax distortions and undeserved tax breaks. Correcting these distortions and unwarranted breaks was a driver behind my own tax reform plan, and I am pleased to see that the Camp proposal includes four of my plan’s six components.

First, Camp recognizes that it is not a good use of tax dollars to provide a bigger tax break — through the mortgage interest deduction — to someone who buys a $1 million house than to someone who buys a $500,000 house. Second, the Camp proposal eliminates the state and local tax deduction that is, in effect, a federal subsidy to states with high tax rates. Third, the Camp plan repeals the complex and distortionary Alternative Minimum Tax. And fourth, it phases in a reduced corporate tax rate of 25 percent.

But these are just four of many proposed reforms, and the Camp plan includes radical changes in many areas. According to the Ways and Means Committee, 95 percent of taxpayers would be able to claim the standard deduction instead of itemizing their deductions. This alone is a huge simplification and would greatly improve the fairness of the tax code because it reduces the chance that similarly situated taxpayers might face very different tax burdens.

Making the tax code simpler and fairer and reducing the need for workers, families, and business owners to make tax-motivated decisions are important conservative objectives.

I am concerned that the chairman’s proposal may raise the tax rate on new business investment by changing depreciation schedules. And other changes, like a surcharge on big banks, may be politically appealing to some but are not sound tax theory. But overall, the plan shows political courage and embraces admirable policy objectives.

Tax reform offers the opportunity to create a more level playing field, which will help our economy grow. Making the tax code simpler and fairer and reducing the need for workers, families, and business owners to make tax-motivated decisions are important conservative objectives. If the cost of that reform means ending tax breaks that don’t make much sense outside of Washington, that’s another great reason to pursue it.

Tax reform will be a hard fight. And frankly, without presidential leadership, it may prove impossible. But yesterday, Chairman Camp brought Washington one step closer to that goal.


Alex Brill is a research fellow at the American Enterprise Institute.

FURTHER READING: Brill also writes “Understanding Tax Fairness (and Why the Buffett Rule Is a Distraction),”
Kevin A. Hassett examines “The Progressive U.S. Tax Code,” and John Steele Gordon observes “The Personal Income Tax at 100.” Sita Nataraj Slavov  notes “The Penalties of Our Tax Code,” Matthew Jensen gives “An Honest Accounting of the Corporate Income Tax,” and James Pethokoukis says “Dave Camp’s Mortgage Interest Reform Is Maybe the Best of His Tax Reform Plan.”

Image by Darren Wamboldt | Bergman Group

 

 

 

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