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If Republicans ever want to govern again, they are going to have to take back the tax issue, which they have completely and inexcusably lost to the Democrats since 2008.
Unfortunately for them, the tax-code overhaul unveiled yesterday by Rep. David Camp (R-Michigan), chairman of the House Ways and Means Committee, fails to take it back.
It is, to be sure, an admirable failure -- a bold proposal, three years in the making, with many merits. But it's not nearly as bold as these troubled economic times demand, or voters want.
The Camp Plan admirably simplifies the tax code (greatly reducing the number of Americans who have to itemize). But it won't spur long-term economic growth. And it still redistributes wealth, distorts economic activity, indulges in social engineering, and (in the case of large businesses versus small) plays favorites.
Is it better than the status quo? Yes.
Will it revive the economy (and thus Republican political prospects)? Doubtful.
Economic growth can only be spurred by a combination of reduced spending, less regulation, and lower taxes.
Alas, Camp’s plan doesn't include any of those things -- though it does, to be sure, represent a big step in the right direction.
Here are some of the main features of the plan, with my own reactions:
Scraps Dozens of Loopholes and Giveaways. Camp cheerfully takes a bulldozer to dozens of special-interest credits, deductions, exemptions, and loopholes -- including the deduction for state and local taxes that rewards high-tax states like New York at the expense of low-tax states like Texas -- and deposits them in the policy landfill where they belong. This is by far the plan’s best feature, and I would love to be a fly on the wall of the Chamber of Commerce and certain K Street lobbies this morning.
Reduces the Number of Brackets. Camp compresses the current seven tax brackets (10, 15, 25, 28, 33, 35, and 39.6 percent) into just three: 10, 25, and 35. The new 25-percent bracket would begin at a level of $35,600 in annual income for a single filer, $71,200 for joint filers. The new 35-percent bracket would begin at the same income levels as for today’s 39.6-percent bracket: $400,000 for single filers and $450,000 for joint filers. (These levels, and many other code provisions, would be indexed to rise annually with inflation, using the so-called “chained CPI” measure, which rises a bit more slowly than traditional CPI.)
Isn't Single-Rate. Unfortunately, Camp leaves three brackets. Why? Why not just one? The only reasons to have more than one are to redistribute wealth (tax "rich" folks at a higher rate than the rest of us) and to hide the true cost of government (make it seem smaller to most voters than it really is). Neither reason is really defensible. Camp should have proposed a single-rate system that transparently shows taxpayers the full costs of Big Government.
Reforms EITC. Camp replaces the redistributionist, fraud-ridden Earned Income Tax Credit (EITC) with a simple offset that effectively eliminates the burden of the payroll tax for many low-income workers.
Repeals AMT. Camp scraps the Alternative Minimum Tax, possibly the dumbest tax ever devised by man.
Seeks to End IRS Political Targeting. As the 2012 election showed, the IRS has long been used as a tool by presidents of both parties to harass their political opponents. Camp includes a number of reforms to curb these abuses, though I'm skeptical completely eliminating them is possible so long as Washington is in the business of deciding which kinds of speech deserve to be "tax-exempt."
Regains the Mortgage and Charitable Deductions. Camp retains the popular but unjustified mortgage-interest and charitable deductions, in modified form. He may have decided he won't be able to pass the bill if he eliminates them overnight, but surely he could have phased them out over some reasonable period.
Retains “Pro-Family” Social Engineering. Camp increases the child and dependent tax credit from $1,000 per child or dependent to $1,500 and indexes it to rise with inflation. Some conservatives fancy using the tax code for social engineering. They want to use it reduce the costs of child-bearing and child-rearing. Those are very nice goals, but the Constitution doesn’t authorize Congress to pursue them; and even if it did, such subsidies are much better administered as simple cash welfare payments rather than tucked into the tax code.
Fails to Consider the Payroll Tax. Income tax reform can’t be done in isolation from the payroll tax, which is the biggest tax most Americans pay and a bigger burden on most families than the income tax, especially lower-income workers. Although Camp tries to soften the blow by retaining the EITC in a revised form, he still shifts a lot of the income-tax burden onto lower-income workers, making his plan a political nonstarter.
A better approach, if we are being bold, would be to tackle both the income and payroll taxes at the same time. This would give Congress a bigger policy arena to work in, and would help ensure that reform actually reduces taxes for everyone, instead of just shifting burdens around.
Raises Capital Gains Taxes. Camps raises the top marginal income tax rate on capital gains and dividends from today’s 23.8 percent to 24.8 percent and effectively treats capital gains as ordinary income, which they are not, having been taxed once already at the corporate level. Excluding 40 percent of the gains from tax doesn't really solve this problem. He also moves in the wrong direction on expensing and depreciation. Business should be allowed to write off all their capital investments in the year they’re acquired, but the plan stretches out the write-off periods.
Reduces the Nation’s Capital Stock. The nonpartisan Joint Committee on Taxation officially estimates that, while Camp’s plan would boost GDP in the first decade, it would also reduce the nation’s capital stock (our seed corn) in future decades -- the very opposite of what we need for long-term growth. This is a big problem.
Keeps Subsidizing Excessive Health Spending. The plan’s biggest failing, in my view, is on health care. Out-of-control health care costs are the single biggest driver of federal debt and deficits. The tax code’s single biggest distortion, after its negative effects on job creation, is its promotion of medical inflation. If you are going to overhaul the entire income tax code, you need to address the health care problem. Camp does not. Health benefits are income, but today’s tax code excludes employer-provided health benefits (and some other fringe benefits) from taxation. In an ideal system, all income would be taxed once and only once. If we are going to tax income, health benefits should be taxed as income. For prudential reasons, Camp refrains from touching the massive health care subsidy, since it could upset the one in two Americans who currently benefit from it. That will spare him some political grief; but in the context of a complete overhaul of the income tax, it’s not excusable. He does preserve the existing tax breaks for Health Savings Accounts (HSAs), which, in the current context are our best building-block toward patient-centered health care. But otherwise, Camp has passed up an opportunity to help wean Americans from the health care exclusion, a hidden entitlement that is the single biggest factor in out-of-control health care cost growth and the biggest driver of our national debt. If he feels constrained to retain a massive health insurance subsidy in some form, a better way to handle it would be to eliminate the exclusion and propose a new lump-sum, means-tested health insurance voucher system on the spending side of the budget. (And phase out that voucher by a date certain, in order to get back in good standing with the Tenth Amendment.)
Isn’t Bold Enough. By not eliminating all special-interest provisions, Camp has left the ground fertile for them to grow back and multiply. That’s what happened after the 1986 reform, which lasted a mere four years before Congress backslid. Today, we are arguably worse off than before the '86 reform. According to the Mercatus Center at George Mason University, 4,428 changes were made to the tax code from 2001 through 2010. That’s more than one change per day. The same study shows that from 2002 through 2011, lobbyists spent more than $27 billion petitioning federal, state, and local governments, for tax changes, which may be likened to earmarks. If we're going to build a whole new tax system, let's build it to be less prone to tweaking and corruption.
A Political Box
Politically, Republicans remain trapped in a box of their own making, and will never escape it, till they propose something that inspires real live voters (and not just K Street lobbies or Beltway think tanks).
The box comes from trying to simultaneously hold the traditional conservative view that the tax system should treat everyone the same and the progressive or socialist idea that tax rates should be graduated and the economy micromanaged. Politicians who refuse to choose between these two ideas will remain in the box.
What would truly inspire real live voters?
A truly inspiring plan would treat all Americans equally.
A truly inspiring plan would clear a broad path for every American to work, save, and invest as he sees fit -- would lift the weights of excessive government from every shoulder -- and thereby unleash economic growth and higher prosperity for all.
A truly inspiring tax plan plan would not penalize investment, redistribute wealth, perpetuate distortions, engage in social engineering, or create new taxes on specific industries.
Camp's plan, sadly, meets none of these criteria.
Why did Republicans lose the tax issue? Because in 2008, Barack Obama outflanked John McCain on both the left and the right by urging higher income tax rates on the “rich” (which is appealing to the vast majority of Americans who think of themselves as “not rich”) while viciously attacking McCain’s plan to “tax your health benefits” (an essentially sound policy that was politically foolish because it would disrupt existing health insurance arrangements for half the country, overnight).
In other words, McCain proposed raising taxes on most Americans while Obama proposed raising them only on the “rich.” Guess who won.
After his election, Obama went and taxed our health benefits anyway (to help pay for Obamacare, by way of a new tax on “Cadillac” health plans); and then, four years later, he forced a defeated (and defeatist) Republican leadership to raise taxes on the "rich" (by reversing most of the Bush tax cuts) and on the middle class (through a massive payroll tax hike).
And so McCain’s losing tax principles became law under President Obama.
Meanwhile, the economy has entered the sixth year of what amounts to a jobless recovery.
Conditions are now ripe for a GOP breakout from the tax box and a comeback on the tax issue. Conditions have arguably not been this favorable for Republicans since the late 1970s. But to win, the party of Coolidge and Reagan must be bold and principled. It must inspire.
Wanted: A Single Rate, and A Massive Tax Cut
What should Camp have proposed?
A single rate. And a massive tax cut.
By keeping a multi-rate structure, he deprives himself of the justice argument: he fails to treat everyone the same.
By attempting to be “revenue neutral” -- Beltway speak for “just move the shells around” -- Camp merely shifts more of burden of the income tax onto the 47 percent of Americans who currently pay no income tax. While his bill is certainly flatter, fairer, and simpler than today's tax code, “revenue neutrality” kills the plan in its cradle, ensuring that it remains a political nonstarter. If he wants to actually overhaul the tax code, he’s going to have to cut taxes for most Americans.
Would a massive tax cut increase the deficit? Yes. Do deficits matter? Of course. But deficits are currently shrinking. And balancing the budget requires a combination of spending cuts and increased receipts (from faster economic growth, of course, not tax hikes). As Coolidge, Kennedy, and Reagan all showed, a massive tax cut can be a huge shot in the arm to a struggling economy.
Tax cuts are a political winner.
Proposing massive tax cuts -- coupled with massive spending cuts that bring about a massive reduction in the size and scope of the federal establishment -- would spur massive economic growth and a massive shake-up in the political landscape, and fuel a massive political recovery for the GOP.
In sum, Camp's plan is an admirable failure -- but also a welcome one.
At just the right moment, it gives conservatives and libertarians an opening to drive a real -- and much-needed -- national debate about how to promote economic growth and expand freedom.