The Camp tax proposal and Reform Republicanism

House Ways and Means Committee Chairman Dave Camp has proposed a radical overhaul of the U.S. Tax Code. Camp’s proposal broadens the tax base and lowers tax rates, which is the correct direction in which to move. Camp touts his proposal as “tax simplification,” which seems to be fair up to a point. However, his 1,000 page bill will leave federal taxation a complicated affair.

Here, via Accounting Today, are some of the main features of Camp’s proposal:

• New Individual and Corporate Rate Structure: Flattens the code by reducing rates and collapsing today’s brackets into two brackets of 10 and 25 percent for virtually all taxable income. More than 99 percent of all taxpayers would face maximum rates of 25 percent or less. The plan also would reduce the corporate tax rate to 25 percent.

• Larger Standard Deduction: Provides a significantly more generous, inflation-adjusted standard deduction of $11,000 for individuals and $22,000 for married couples.

• Larger Child Tax Credit: Increases the child tax credit to $1,500 per child, adjusts it for inflation going forward, and expands the number of families that can claim the credit.

• New Rules for Taxation of Investment Income: Taxes long-term capital gains and dividends as ordinary income, but exempts 40 percent of such income from tax, resulting in a 3 percentage point decrease from the maximum rates individuals pay today on such income.

• No AMT: In addition to lowering tax rates for families and all job creators, the plan repeals the Alternative Minimum Tax for individuals, pass-through businesses, and corporations.

• Permanent R&D Incentive: Invests in innovation by making permanent an improved Research & Development Tax Credit.

• More Affordable Health Care: While the plan generally leaves Obamacare policies untouched and for a later debate on health care, there are two main exceptions premised on strong bipartisan support for: (1) repeal of the medical device tax and (2) repeal of the medicine cabinet tax, which prohibits use of funds from tax-free accounts to purchase over-the-counter medication without first obtaining a prescription.

• Infrastructure Investment: Dedicates $126.5 billion to the Highway Trust Fund to fully fund highway and infrastructure investment through the HTF for eight years.

• Simplification for Seniors: Reflecting a proposal supported by AARP and Americans for Tax Reform, the plan requires the IRS to develop a simple tax return for individuals over the age of 65 who receive common kinds of retirement income like annuity and Social Security payments, interest, dividends and capital gains.

• Charitable Giving: Expands opportunities to make tax-deductible contributions past the end of the tax year, makes permanent conservation easement incentives, simplifies exempt organization taxes, and sets a floor instead of a cap to the amount of donations that can be deducted.

In addition, and controversially, Camp’s proposal would reform the mortgage interest deduction. Taxpayers will be able to continue claiming an itemized deduction for interest on acquisition indebtedness, but the $1 million limitation would gradually be reduced, over a four year period, to $500,000.

James Pethokoukis defends this aspect of Camp’s plan. He argues, sensibly it seems to me, that the mortgage interest deduction is “a $70-billion-a-year, market distorting subsidy for the purchase of expensive homes by high-income taxpayers.” It does little, he says, to promote homeownership by Americans of more modest means. “There is no sound economic reason to use the tax code to artificially advantage the higher-end real estate sector over other sectors of the economy,” Pethokoukis concludes.

Camp’s proposal will not be enacted, of course. Not only are the Democrats prepared to prevent enactment, but the proposal has not been greeted with uniform approval from Republicans.

I believe that the real purpose of Camp’s proposal is to influence Republican thinking about taxation. As Yuval Levin puts it:

The Dave Camp tax proposal marks an important point in the evolution of Republican thinking on taxes in recent years – an evolution from an approach that seeks to maximize the overall efficiency of the code in the cause of growth without regard to distributional effects to one that seeks to encourage growth, encourage work, and provide meaningful tax relief to most American families.

On balance, Levin seems to prefer Mike Lee’s tax reform program, which is based on similar thinking. He finds that “the two proposals are quite compatible, and some combination is where Republicans should end up on taxes in the next few years.”

Camp’s proposal is another step in the direction of Reform Republicanism. I disagree with those who say Republicans can’t prevail in 2014 without being reformers. In that election, it seems to me, Republicans will probably do quite well sticking to opposing Obamacare and avoiding gaffes and bad nominees.

But 2016 will be another matter. The Democrats are likely to nominate a geezer with standard-issue liberal views — probably Clinton, maybe Biden — at a time when the country is likely to be looking for fresh ideas. In that context, Reform Republicanism, if well thought out, will stand the GOP in good stead.

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