Ways and Means Committee Chairman Dave Camp (R-Mich.) released a detailed discussion draft on comprehensive tax reform Wednesday that eliminates inefficiencies in the tax code and makes it simpler. The Concord Coalition commends Chairman Camp for his efforts. The shame is that it looks like the rest of Congress and the President are desperate to avoid discussing how to improve upon it and then enact a reform plan.
Camp’s proposal effectively leaves the tax code with three tax brackets: One at 10 percent, one at 25 percent, and an additional 10 percent surtax for high earners. To achieve this consolidation and lowering of rates without adding to the deficit, Camp’s plan limits, discards or merges many of the code’s tax expenditures -- special provisions that favor certain behaviors, individuals and businesses. The proposal significantly alters “sacred cow” provisions like the home mortgage interest deduction, the deduction for state and local taxes, and the deduction for charitable contributions. It also eliminates numerous smaller provisions for special interests, like the tax-exempt status of some professional sports leagues.
The Joint Committee on Taxation (JCT) has scored Camp’s plan as revenue-neutral over the 10-year budget window. The Concord Coalition, however, believes that revenue neutrality is the wrong goal for tax reform. Our mandatory spending programs are projected to rise steeply in the future. Substantially curbing that growth will be extremely difficult because of the aging of the population and inevitably rising health care costs. So even with a good deal of additional spending restraint, a higher revenue path than currently projected will likely be necessary essential to avoid large deficits and an unsustainable increase in the national debt.
Furthermore, while projections indicate Camp’s plan wouldn’t increase the deficit over 10 years, there are reasons to believe it would increase deficits beyond that budget window. That is because the plan uses a number of timing gimmicks and one-time savings provisions to offset permanent rate reductions. One example of this is the proposed shift to Roth-style individual retirement accounts (IRAs) as the main retirement savings vehicles in the tax code. These accounts, where people deposit after-tax dollars but then have the savings accrue tax-free, mean additional government revenue over the short term but less over the long term.
However, it would not be difficult to increase revenue from the basic structure that Camp’s draft sets up. Both the Simpson-Bowles and Rivlin-Domenici fiscal commissions proposed similar simplification and limits on tax expenditures; they just set the tax-bracket rates a little higher in order to put revenue towards deficit reduction.
It is worth mentioning that relative to a “plausible path” for revenue, where current tax provisions are extended into the future, the Camp plan could actually raise revenue over the budget window by nearly $600 billion.
The JCT also compared Camp’s proposal to current law and through “dynamic scoring,” which determines the effects that changes to spending and tax policies could have on economic behaviors. In the most optimistic scenario, JCT projected that Camp’s proposal could accelerate economic growth enough to generate $700 billion in revenue compared to what it would be under the current-law baseline, which assumes tax and spending provisions that are set to expire actually do so. While dynamic scoring remains a controversial technique, it is helpful that JCT provided this extra information, which shows the positive economic effects that could occur by creating a simpler and more efficient tax code.
By adding specifics to what is usually a hypothetical discussion, Camp’s proposal could serve as a suitable starting point for a substantive debate on tax reform. Unfortunately the plan seems unlikely to be treated that way. Republican leaders in Congress have been non-committal at best. The next test from Camp’s own colleagues will come when Chairman Paul Ryan and the House Budget Committee unveil their budget blueprint in the coming months. In previous years, that committee has included a placeholder for comprehensive tax reform with a rate structure similar to Camp’s. What Ryan and his committee have never done is specify the tax expenditures they would reduce or eliminate to pay for lower rates. Whether they include a nod to the thorough, comprehensive and credible plan from their own Ways and Means chairman or remain vague and non-specific will be a big test of the seriousness in the Republican conference for comprehensive tax reform at some point.
Camp’s blueprint also includes a number of tax reform ideas that have been proposed at various points by the Obama Administration. Yet the administration has never proposed, nor seemed interested in, a comprehensive rewriting of the tax code. Given the hostile reaction of some Senate Democrats to the Camp plan, and with the change in leadership of the Senate Finance Committee, a comprehensive rewrite faces long odds in the Senate as well.
We commend Chairman Camp for releasing a detailed and serious proposal to reform the tax code. In its current form, the code is inefficient at collecting revenue and riddled with provisions for special interests. Camp’s proposal grapples with the reality that fiscal reform must contain unpopular provisions. We hope Congress as a whole can at some point confront this reality as well. As the scoring of the Camp proposal shows, serious tax reform could pave the way for stronger economic growth and help set the nation’s finances on a more sustainable track.
Concord Coalition Policy Analyst Chad Laurie contributed to this blog post.