Dave Camp vs The Tax Code, Ctd

Yuval Levin rightly thinks the Camp plan, detailed here and here, sets a new standard for conservative tax reform:

That this proposal has come from the chairman of the House Ways and Means Committee means it will inform future tax-reform proposals on the right. That it proposes specific, concrete changes to a large number of tax expenditures as ways of counterbalancing the effects of lower rates means it can open the path to an actual process of negotiation and legislation. Too many of our tax debates in recent years have taken place in the abstract.

And that it appears to hold middle-class families harmless (by increasing the tax burdens of some wealthier Americans while actually improving their work incentives at the margin) is important because many conservative tax proposals in recent years have funded rate reductions by increasing tax burdens in the middle. Republicans certainly can’t win on taxes if they increase the cost of living in the middle class.

Reihan especially likes that the plan eliminates the deduction for state and local taxes:

In theory, this will end the implicit subsidy of the residents of high-tax states by the residents of low-tax states, and it might also make the residents of high-tax states more attuned to the state and local tax burden.

Another view is that in the absence of the state and local tax deduction, state and local governments might under-invest in the human capital of their residents, and this in turn will shrink the tax base in future years. Coupling the elimination of the state and local tax deduction with a substantial increase in the child tax credit is an excellent way to address this concern.

But Ramesh wishes for an even bigger child tax credit:

Camp missed an opportunity to rectify one serious public-policy problem in a way that would appeal to a lot of middle-class voters. Federal policy has a bias against children, and especially against large families. By expanding the child tax credit to $1,500 per child from $1,000, Camp’s plan would reduce that bias, but only very modestly. A bigger expansion would’ve required Camp to modify other elements of his plan so that it would continue to raise as much revenue as the current code: He might have had to refrain from abolishing the alternative minimum tax, for example. It would have been a better policy, and it would have been easier to make the case for it to middle-class voters.

And Ryan Ellis criticizes the proposal for raising taxes on capital:

Under tax law, when a business buys a piece of equipment or real property, they generally cannot deduct that property in the first year (small firms have an exception to this).  Rather, they are forced to deduct the expense in pieces over several to many years in a process called “depreciation.”  Ideally, all business inputs would be expensed the first year, but the tax code is not an ideal document.

The Camp draft makes the depreciation bug even worse than current law.  They move to a slower system of depreciation where business assets must be depreciated over a longer time period and at a slower rate. … There’s also a sin of omission on capital.  The tax rate on capital gains and dividends is basically kept the same at about 24 percent … .

But crunching the numbers, Joseph Rosenberg concludes that businesses would see their overall tax burden reduced:

Add it all up and the Camp proposal would raise more revenue from businesses in the ten-year window than under current law. But does he really raise their tax burdens?

Probably not. The largest revenue raisers in the budget window are provisions that affect the timing—rather than the level—of deductions, and the temporary transition tax on deferred foreign profits. The timing changes raise more revenue during the transition than in the long-run (when higher deductions from past investments partially offset lower deductions for current investments) and revenue from the transition tax will rapidly disappear beyond 2024. Combined with the phased-in corporate rate cut and other international tax changes, this suggests that, on balance, businesses will be winners from this proposal.

Philip Klein says the GOP should go after payroll taxes:

In 2012, combined payroll taxes cost more than income taxes for nearly 80 percent of middle-income Americans, according to TPC analysis, and 63 percent of all taxpayers. And this was in a year in which the rate was temporarily reduced by 2 percent as part of a short-term stimulus agreement.

Payroll taxes distort economic activity. Not only do they reduce Americans’ paychecks, but they also increase the cost to businesses of hiring and maintaining workers, thus increasing unemployment. Because traditional payroll taxes apply to only the first $113,700 of earnings, they eat up a larger percentage of the paychecks for middle-income Americans.

Should Obama embrace the Camp plan? Zachary Goldfarb thinks so:

The funny thing is the Camp tax reform proposal is a bit of mirror image to Obama’s own budget proposals — compromise offers that try to reach the other side halfway. The Camp proposal is very much in the Obama mold.

Ahead of the 2014 mid-terms, though, Obama and the Democrats are going to blow Camp’s proposal off. And that probably makes the most sense politically. But practically speaking, Camp has offered a proposal Obama probably could work with.

I don’t see why Obama has to wait. He finally has a Republican legislative proposal that is a clear basis for a solid compromise in an area long overdue for reform. Why not grasp it with both hands, prove that gridlock is not permanent, and aim for a Reagan-style bipartisan deal that can help empower economic growth?