Pethokoukis

Dave Camp’s tax reform plan shows how the US is sabotaging its own economy

By Tax Credits (CC BY 2.0)

By Tax Credits (CC BY 2.0)

Good for the House Ways and Means chairman. If nothing else, Dave Camp’s big tax reform plan will highlight the terrible, unforced error that is the US tax code. By lowering marginal tax rates, compressing tax brackets, and eliminating or trimming many economically inefficient tax breaks, the blueprint would — according to The Wall Street Journal’s review of Joint Committee on Taxation analysis — boost real economic growth by as much as 1.5% to 1.6% a year over the 2014-2023 period and create nearly 2 million more private sector jobs. Of course, your models may vary. But the JCT analysis is encouraging, and suggests tax reform is a key element in boosting America’s potential GDP growth.

Now we won’t know the details until tomorrow, but according to media reports (a) the top income tax rate would fall to 25% from 39.6%; (b) seven existing brackets would be collapsed into just two, 25% and 10%; (c) investment gains would be taxed like ordinary wage income, but 40% would be excluded from income for tax purposes; (d) a 10% surtax would apply to couples earning $450,000 or more and hit, says the WSJ, “a broad swath of their income, including some sources that aren’t currently taxed, such as employer provided health care and tax-exempt bonds.” Can’t wait to see that last point fleshed out.

It’s unclear right now what the budgetary effects would be. Perhaps revenue neutral, perhaps a sizable revenue gainer when higher economic growth is factored in. The reports I saw today didn’t indicate what the new, lower corporate would be. But my reading of the research gives me some confidence that a big rate cut, even without base broadening, would hardly some big money loser for Washington. In any event, lowering the combined corporate-investment tax rate is solidly pro growth.

Of course, no one thinks the Camp plan has any chance of passage this year. Republicans worry about the political impact in an election year that is looking pretty good for them: Discouraging analysis from Politico: “More than a dozen skeptical lawmakers and senior aides told POLITICO they thought it was a strategic blunder to unveil a plan outlining which loopholes to cut, whose rates will be slashed and which sector of the economy will see higher taxes when there’s little expectation the code will be reformed in 2014.” On the other side, many Democrats think lowering tax rates, particularly for the rich and business, would be moving the tax code in the wrong direction.

Sure makes for fascinating politics. Meanwhile, the Not-So-Great-Recovery schleps on …

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

3 thoughts on “Dave Camp’s tax reform plan shows how the US is sabotaging its own economy

  1. It has already been announced that this plan is a no-go with the Democrats. It seems that they are demanding an extra trillion dollars in taxes over the next ten years for it to be acceptable. How in the world do these people think that raising taxes during an economic downturn is a good thing is beyond me. Of course, the Democrats do not seem to think that this is a period of economic uncertainty or a period where the economy is doing poorly either.

  2. Perhaps the greatest challenge with any meaningful tax reform is that it will be highly disruptive to individuals and businesses that plan around the tax code. That is why there must be a phase-in period for reform to work. A 5-10 year period where a dual tax calculation is necessary. First year the new code is weighted say 20% and the old at 80%, then 40/60, 60/40, etc. Then on the back end we have a simplified tax system without as much chaos and uproar.

  3. “Collapsing tax brackets” is not only a patently bad idea, if will cause plenty of turbulence at the break point.

    I think that it’s an award-class dumb idea.

    A fine-resolution increase in rates as taxable income rises, is much fairer than a series of shifts, let alone one big shift.

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