Economics, Taxes and Spending

Tax reform: Legislating vs. campaigning

Bold tax reforms are popping up everywhere these days, from presidential candidates and members of Congress alike. A comparison of the plans highlights the stark difference between campaigning and legislating.

First, let’s look at some campaign proposals. Herman Cain’s surge in popularity seems tied to the appeal of his 9-9-9 plan, a combination of a 9 percent income tax and two 9 percent consumption taxes. Governor Perry grabbed headlines with a proposed 20 percent flat income tax that would exist as a parallel, optional alternative to the current tax system.

The second category of reform proposals are those originating with legislators themselves. Senators Wyden and Coats introduced the Bipartisan Tax Fairness and Simplification Act of 2011. Congressman Charlie Rangel introduced a bill in 2007 that increased the progressivity of the tax code, cut the corporate rate to 30.5 percent, and increased the tax penalty on income earned abroad.

Enter Chairman Dave Camp of the House Committee on Ways and Means, who this week began to unveil his own tax reform agenda with a proposal to adopt a territorial tax system. The draft proposal represents a fundamental shift from taxing businesses on their worldwide income to a territorial tax system that generally doesn’t tax income earned abroad.

The concept of territorial tax reform is not new. In fact, most of our major trading partners have it and territorial tax reform was a key component of the Simpson-Bowles Commission’s recommendations. But Chairman Camp’s proposal gets specific. It deals with dozens of technical details that must be addressed, such as foreign tax credits under the new regime, Subpart F, and rules governing sales, gains, and losses of controlled foreign corporations. This is only the beginning, as Chairman Camp’s draft legislation indicates that both individual income tax reform and more corporate tax changes are forthcoming.

Presidential candidates enjoy the luxury of bumper-sticker campaign policies and are able to avoid the difficult tradeoffs inherent in specifying the details. Their audience comprises primary voters too occupied with everyday household concerns to be experts in tax policy. As such, the utter legislative infeasibility of Cain’s 9-9-9 plan doesn’t seem to have diminished his popularity.

Lawmakers don’t have the luxury of the stump speech for their bread and butter. They must face the realities and complexity of legislating. In the coming weeks, tax lawyers, accountants, and economists will pore over the pages of Chairman Camp’s legislation and, as he has asked, offer suggestions and comments. That feedback will further inform this bold effort and lead to more refinement and detail.

This week’s tax reform news should remind us that although Congressman Camp isn’t running for president, his views on tax reform may matter more than the catchy slogans we hear from candidates.

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