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Rep. Dave Camp's tax plan is smart, brave — and going nowhere

Rep. Dave Camp

On Tuesday, I tipped my hat to House Ways and Means Chair Dave Camp (R-Mich.) for his courage and substance in putting out a proposal to comprehensively overhaul the income tax code despite warnings that it would NOT (horror of horrors) be politically advantageous for his party.

On Wednesday, he released a much more detailed overview of the plan. From what I can tell it is a smart, brave and perhaps an excellent proposal that will be declared dead on arrival because of some of the oxen it gores. But that won't be Camp's fault.

I'm not expert enough on tax matters to know what I'm talking about, but this plan would be simpler and possibly more progressive than what we have now. Camp would raise the standard deduction, which would add millions of middle-class American to the group that can file a basic 1040 and not have to itemize or pay a tax preparer for help. Camp estimates that if his bill becomes law, 95 percent of households can file their taxes without itemizing, and it won't cost them anything. If the overhaul did nothing else, that would be a big step forward.

Liberals will be suspicious of the provisions that lower the basic rate on corporate earnings from 35 to 25 percent and a change in the Earned Income Tax Credit that may shrink its value. But, interestingly, on Day 1 it seemed to be getting a warmer reaction from Democrats than Republicans.

That's because (among a million other things) the Camp plan would also reduce the kinds of income covered by the "carried interest" loophole that has enabled the poor, beleaguered private-equity managers to shield a bunch of their earnings from the income tax. It would impose a new "bank tax" on those big banks that benefit from taxpayer bailouts because they are "too big to fail." It would cut from $1 million to $500,000 the size of a mortgage on which the interest is deductible. It would eliminate a loophole that entrepreneurs, consultants, lawyers, doctors and other professionals use to avoid paying Social Security and Medicare payroll taxes by taking their earnings as business income instead of wages. It would increase the value of the child tax credit for parents of ordinary means, but phase it out for very high earners.

It would end the deductibility of state and local taxes. Democrat Sen. Chuck Schumer of New York said that's a deal-breaker for him, but not for me. It would reduce the number of brackets from seven to two (or three, depending on how you count the 10 percent surcharge on high earners).

The overall goal of Camp's plan was to raise about the same amount of revenue, to be no more or less progressive than the existing tax code, but to greatly simplify it. Intellectually honest righties, who don't want the government trying to influence so many decisions, should welcome the elimination of many credits and deductions, most of which can be viewed as government meddling with how they want to spend their income (rather than how the government thinks they should spend it).

It will take more time and study for people who understand these things to decide if there are stink bombs hidden in the proposal or whether it is really revenue neutral. Some lefties will complain that the goal of raising the same amount of revenue (instead of more) is a deal-breaker, but that doesn't make any sense to me. In the current configuration (meaning with Republicans controlling the House) no bill that raises taxes is going to pass. But the simplifications in this plan may be worth doing for their own sake.

Senate Minority Leader Mitch McConnell has said there is no chance of something like this being enacted this year. House Speaker John Boehner called the plan "the beginning of [a] conversation" lawmakers need to have about tax reform. But when asked whether the Republican Party stood behind this plan sponsored by the man the party had chosen to head the Ways and Means Committee, Boehner said: "You're getting a little bit ahead of yourself." According to the Times story:

When asked about the proposal’s details on Wednesday, Boehner replied, "Blah, blah, blah, blah.”

The chances are excellent that this will come to nothing. But this is a welcome change from the now-normal kind of proposal that is meant more as a political talking point for one party or the other.

For more details, here's Bloomberg's account, and CNN's, and Fox's.

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Comments (39)

Mitt Romney

There just isn't a constituency for raising Mitt Romney's tax rate from 13 to 25 percent. I am just not willing to give credit to politicians who offer pieces of pie which are currently in the sky.

Details and Alternatives

Please remember that the 13% was only achieved because he also gave 14+ to charity. And that 13% was only his federal tax. He still had to pay local and state taxes.
http://www.washingtonpost.com/politics/mitt-romney-releases-tax-returns/...

Just curious, at what rate do you think long term capital gains and dividends should be taxed at? Same for everyone or not? Rationale?

As for pie... Do you then think that politicians should stop proposing new ideas that may or may not go anywhere? What is your alternative?

Other returns

That was only the most recent return, after he had decided to run.
He refused to release his returns for the past ten years, which might well have showed a different picture.

Schumer's response will be the norm

Deal breakers will be anything that special interest groups want to preserve in the tax code. Any proposal will be gutted and be no better than the current system by the time everyone sticks their fingers into it. Boehner's actual response, at least what I heard of it, was much more dismissive and insulting to a member of his party than just the "blah, blah, blah" comment.

Why deduct state taxes?

Why should states taxes be deductible from federal taxes? Aren't low tax states subsidizing high tax states at the federal level? Is this truly fair and equitable?

That is the real reason Senator Schumer is against this proposed tax reform. Senator Schumer wants Texas, Florida, South Dakota, etc to subsidize New York, California and Minnesota.

Other way around

If you look at which states pay the most federal tax, and which states receive the most federal money, it's the low tax states that are being subsidized. Texas, Florida, South Dakota, etc are being subsidized by New York, California, and Minnesota.

It's still a subsidy

It goes from those who don't itemize to those who do. That means it goes from lower incomes to higher. That's usually how tax expenditures work. I'm in favor of killing most of them. If lower tax rates to keep the change revenue neutral is the price, it's worth it. That said, every tax expenditure has a special interest that lobbied hard for it and figures they benefit more from special breaks than from generally lower rates. I suppose that makes carried interest the holy grail of getting rid of these things.

If you want to look at returns to states

I would look at this map.

http://www.ritholtz.com/blog/2012/02/is-your-state-a-net-giver-or-taker-...

If you want to see who is getting most of their state budgets from the feds look here:

http://townhall.com/columnists/taddehaven/2013/06/25/how-much-does-your-...

But I really like the irony of the number of non tax payers and how it seems to match those who get the most money back from the federal government.

http://www.slate.com/blogs/the_reckoning/2012/10/25/blue_state_red_face_...

Does this include

retirees receiving social security?

We need the Wall Street transaction tax

A tax of a fraction of a penny on stock trades would bring in billions of dollars painlessly and would make the people who caused the Great Recession pay for getting us out of it.

Whack-a-mole

If you think you're going to cut corporate taxes by another 10% and make up for it by closing loopholes I've got a nice bridge for sale. That's the problem with revenue neutral thinking. Close the loopholes first, then looks at the rates. Anyways, if you don't think raising taxes is possible why would anyone go to all the trouble of passing a big tax reform bill just keep revenue flat? You don't need to change anything to keep revenue the same, what's the point?

And again, we don't flat revenue, we need more revenue.

On the other hand, if this would actually simplify the tax code it might make it easier to raise revenue more transparently in the future. In theory, as long as investors and high paid executive income is being taxed appropriately (i.e. much higher than now) you wouldn't need corporate income taxes.

So far, so good

Unfortunately, it's likely to also be, "So far, so dead."

Still I'm inclined to like the Camp provisions that appear in Eric's column. They could lower the corporate rate to 10 percent and I might support it – if there was a way to ensure that corporations actually paid the tax. As it is, too many, and especially too many large, corporations have found ways to skate around the tax and pay nothing at all - or even, in the ultimate middle finger to the average citizen, get a refund from the feds despite income in the millions and billions of dollars.

Be that as it may, points to Mr. Camp for his idea. I'd love to see some genuine debate on some of the parts of the plan, but that won't happen. Too bad the "do-nothing" Congress will kill it before it really sees the light of day.

Deductions

Why should states taxes be deductible from federal taxes?

Because you shouldn't have to pay taxes on your taxes.

Aren't low tax states subsidizing high tax states at the federal level?

States don't pay income taxes. And low tax states as a rule, benefit from subsidies from high tax states.

You might want to read your comment again

It contradicts itself in the second to last sentence.

You are not being taxed on your taxes you are being taxed on you income. The proposal says your taxable income doesn't change even if you pay state taxes with it or not. But your net retained income will.

Please remember that the 13%

Please remember that the 13% was only achieved because he also gave 14+ to charity.

that was his personal choice. And bear in mind that in his tax bracket, a huge portion of his charitable deductions are paid for by other taxpayers in the form of tax deductions Mitt receives.

Just curious, at what rate do you think long term capital gains and dividends should be taxed at? Same for everyone or not? Rationale?

It's sort of off topic, but income is income. I don't know of any good reason why unearned income should be taxed at lower rates than earned income.

Do you then think that politicians should stop proposing new ideas that may or may not go anywhere?

No, I just don't think they should get any credit for them.

True but...

Romney did make that choice, therefore his taxes were lower. If he had not made that choice his tax rate would have been significantly higher. (ie more similar to many wealthy people) Your implying that Romney got something special is incorrect. We all have the option to pay less in taxes, just give more to charity.

Here are some ideas for both sides of the argument:
http://www.clearpictureonline.com/SO-Capital%20Gains.html

Looks very reasonable SO FAR

Something more Democrats would probably support than Republicans.
Which makes me wonder when the 'gotchas' will surface....

This proposal is something

that many small business Republicans (like myself) can get behind 100%. But special interest lobbyists will never, ever let it see the light of day. Which is too bad.

Republican talking points

I often find myself in agreement with Republican talking points. The problem is that Republicans aren't in agreement with Republican talking points.

" It would reduce the number of brackets from seven to two"

I don't get the fixation over lowering the number of tax brackets. The number of brackets has nothing to do with making the tax code complicated. I'd like to see more tax brackets...at the upper end. All you have to do is look in the back of your 1040 or 1040A instruction booklet to figure what you owe. Doesn't matter if there are 2 or 20 brackets.

The fewer tax brackets you have

the closer you are to a flat tax and the farther away you are from the Marxist progressive model. All real Americans want a flat tax. Even the Russians have a flat tax now that they're not commies.

I'd suggest that you actually READ Das Kapital

Since socialism (including communism) proposes state ownership of all property, there's no private property to tax! Taxation is therefore an inherently capitalist phenomenon.

I suggest you read the Communist Manifesto

Where "a heavy progressive or graduated income tax" is so important to the cause that it's the 2nd of the ten planks.

I suggest you read a basic history text

The first progressive tax on income was enacted by William Pitt the Younger in 1799. Karl Marx was not born until 1818.

The Communist Manifesto also called for the "[e]qual liability of all to work." Should we oppose that, too?

Complications

I don't get the fixation over lowering the number of tax brackets.

Tax brackets are seen as a complicating factor, and this, by the way, is one way the notion of "complication" is seen as naive. The tax code is a big and complicated document, but for many of us, it's complications are irrelevant. When you do your taxes, the existence of brackets is not at all complicated. You just plug your income into a table, or into a computer program. You aren't aware of the bracket at all.

Also there is a common misunderstanding as to the way brackets work. People think that when they move up in brackets, any increase in tax rate applies to their total income rather than the amount of income in excess of the maximum amount in the lower bracket. I think that widespread misconception contributes to people's distaste for brackets.

We say we like tax simplification and tax reform, but what we want is to pay less in taxes.

The number of tax brackets

You're right, it's an irrelevant distraction.

What a great plan

Camp's plan exempts 40% of capital gains (and investment dividends) from any taxation at all. How does this work out in real numbers? The top marginal tax rate on married taxpayers today is 39.6% (couples with more than $457,600 income). The top capital gains rate is 20%.

Camp wants to cut the top marginal rate to 35%. If you tax capital gains at 35%, but exempt 40% of them from any tax, your effective rate on all capital gains works out to (... wait for i t...) 21%. In other words, Camp is raising the standard cap gains rate by a single percentage point. But since he's also cutting the top rate on all income by nearly five percentage points, rich taxpayers still come out ahead.

You may want to do a little research, its just another scam...

This is a clip that covers it pretty well:"Camp wants to cut the top marginal rate to 35%. If you tax capital gains at 35%, but exempt 40% (Camp's plan exempts 40% of capital gains (and investment dividends) from any taxation at all.") of them from any tax, your effective rate on all capital gains works out to (... wait for i t...) 21%. In other words, Camp is raising the standard cap gains rate by a single percentage point. But since he's also cutting the top rate on all income by nearly five percentage points, rich taxpayers still come out ahead.

http://www.latimes.com/business/hiltzik/la-fi-mh-tax-reform-20140226,0,6...

The good news is that Republicans are getting the message that folks don't like the Rich getting all the breaks, the bad news is that folks like Eric Black think that they can be trusted to actually do something about it.

The bad news is

we have too many people in this society with wallet envy. What difference does it make to you what someone else pays in tax?

Most middleclass people pay an effective rate of 10-14% so what are you complaining about?

Health insurance

"we have too many people in this society with wallet envy."

From where I sit, the problem in our society is that we have way too few people with health insurance envy.

This is only federal income tax

Most people pay considerable more in total taxes.
And for someone talking about 'wallet envy', you seem awfully concerned with what the rest of us do.

Better Discussion

It says something that this 'simplification'

runs to 182 pages!
Of course, that's an order of magnitude or two shorter than the total current tax code, but Camp's plan would need a lot of implementing legislation, which would certainly add another ten pages to each page of the plan.

What we need is not simplification of the current code, but a zero based start from scratch without a lot of fudge factors built in (no, not a flat rate) that is both fiscally and politically progressive but still conceptually simple .
Not easy!

Pages

There aren't many problems in life to which I have complete and definitive solutions but documents with too many pages are one thing I can solve. Make the fonts smaller and the margins narrower.

Next problem.

Rearranging deck chairs

Since 1980 everyone has seen their tax obligations reduced. The poorest families have seen about a 5% decrease and the richest families about 14%. Somewhat irritating but understandable given the advantages wealth gives you for influencing the crafting of legislation. In that same time period income for the poorest families as gone up 30%, which is barely keeping pace with inflation. Effectively zero increase. The wealthy has seen an increase of over 200%. New tax plans have come and gone but the wealthy have continued to extract money from the economy. The government has shown no willingness to change that and maybe that's a good thing. When workers organize and demand their fair share of the wealth being generated, then you'll see economic recovery. Hopefully, we won't need to refight the battles of the early 20th century but if history is any guide, it won't be easy.

Da Comrade

"When workers organize and demand their fair share of the wealth being generated, then you'll see economic recovery."

Your fair share of the economy is there for the taking. All you have to do is educate yourself and then, you know, go earn it.

And of course

the United States has less social mobility than most of the developed world.
People born in the bottom quintile are likely to stay there; or at most move up to the next highest quintile.
The number of Horatio Algers who go from the bottom quintile to the top is miniscule.
Parents' income and education is the best predictor of socioeconomic status.

Bill Gates is the classic case.
He was at best an adequate programmer who dropped out of college after a year.
His real advantage was that he was the wealthy son of two corporate lawyers.
So, when he saw that an open source programming language (CPM) could be easily made into a commercial product, he took the opportunity (credits to him).
He made his money, however, by selling the rights to his version of other people's work by snookering IBM, who thought that they were dealing with a college kid who was ignorant of the law. By the time they read the fine print, Bill Gates was rich (credit to his parents).

So again, he had the foresight to choose the right parents.

However the discussion goes ….

The game is rigged! No "network," no "connections," no advancement. Ya prove education gives advantge over being connected ! Go ahead to it !

Yes it is called the Dixification of the midwest

It's now getting to be who your daddy or mommy knows.

But we also have a bunch of degrees that no longer get you a job. As an economist if I want to work as an economist I need to have had at least a masters degree. I believe the same holds true for biologists, anthropologists, historians, and now MBA's are a dime a dozen I imagine you have to have a track record to get a job with one of those.

I suspect extroverts have a better time than introverts and people in their 30's a better chance than people in their 50's. I started taking my age off my resume after age 45.

Now it would be great if that gave us good employees but it doesn't necessarily do that because low and behold people also don't tend to fire their friends kids. So a lot of dead weight hangs around in the up stairs offices.