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Commentary By Diana Furchtgott-Roth

Dave Camp’s Tax Plan Doesn’t Go Far Enough

Economics Tax & Budget

I had high hopes for House Ways and Means Chairman Dave Camp’s tax reform plan. Those hopes were dashed.

Yes, I knew that the plan did not have much chance of passing the Senate under its current leadership.

But the plan could have sent a signal to voters about what kind of tax system to expect if the Republicans won the Senate, and possibly the presidency.

Instead, the plan announced on Wednesday, after years of hearings, would not substantially reduce taxes, according to accompanying tables issued by the Joint Tax Committee. Over the period 2014 to 2023, taxes on individuals — including repeal of the alternative minimum tax — would decline by about $600 billion. Without AMT repeal, individual taxes would rise by $743 billion. The top rate would go back to 35% from 39.6%, and other brackets would be streamlined into two rates of 10% and 25%.

Nor would corporate tax receipts decline under the Camp plan. Although the corporate tax rate would be reduced from 35% to 25%, corporate tax payments are projected to rise by $562 billion over the next decade, and taxes on multinationals by $68 billion. This is because depreciation schedules for capital equipment are lengthened, so that corporations would have to take smaller write-offs for the capital they purchase. This would leave them fewer resources for other investment and for hiring.

The bill repeals the excise tax on medical devices for a revenue loss of $30 billion over 10 years, but adds another excise tax on “systemically important financial institutions” that would bring in $86 billion over the same period.

Presumably members of Congress would determine what were these systemically important financial institutions, leaving the door open for the cronyism that should not form part of sensible tax reform.

The bill as a whole is practically revenue neutral. It increases tax revenues by about $3 billion over the next decade.

Macroeconomic models used by the Joint Committee on Taxation , however, show that the Camp plan increases GDP growth by 0.1% to 1.6% per year. This is because lower tax rates will encourage about 1.8 million more people to come into the labor force and work, giving them more money to spend on consumption. These models use “dynamic scoring,” so-called because they attempt to show the increase in economic activity due to a more efficient tax system.

Under the dynamic scoring methodology, investment in capital equipment will decline from 2016 to 2023 due to repeal of accelerated depreciation. Between 2019 and 2023 (estimates are only shown for five-year periods, not for 2016 to 2023), investment in business capital will decline by 0.2% to 1.0%. This is not tax reform, it is tax retrogression. But it is depicted as positive, because “businesses are expected to substitute some labor for capital,” so more people will be hired.

It is not clear how true to life these macroeconomic simulations are that predict an increase in labor force participation. The Joint Tax Committee states that “it is assumed there is no involuntary unemployment and thus changes in employment are the same as changes in the labor force.” We know that there is substantial involuntary unemployment now.

This disappointing proposal is not entirely Camp’s fault. Tax reform proposals in America are hobbled by the Congressional Budget Office’s scoring conventions, so politicians are forced into revenue neutral proposals.

In Italy, the new Prime Minister Matteo Renzi can stand up and announce that he is cutting payroll taxes by $138 million dollars. When Canada cut taxes in the early 1990s, sending its deficit plummeting and its economic growth soaring, it did not have to ask the CBO for permission.

An improved plan would have kept the two rates, 10% and 25%, without adding the top 35% rate. This would have kept the top corporate rate — 25% — the same as the top individual rate, which is the rate for small businesses. That would be an advantage because businesses need low tax rates to grow. Further, small businesses would not be encouraged to file as corporations in order to take advantage of the 10 percentage point lower rate.

In addition, rather than extending the time over which businesses could write off capital, true tax reform would have reduced it, by allowing capital to be expensed as it is purchased. That would have resulted in a substantial investment in capital, increasing employment for those who were making the plant and equipment.

If the Joint Tax Committee’s models estimate that 1.8 million more people would be working after 10 years with increases in taxes on labor and capital — reversing some of the 2 million fewer people who are forecast to leave the labor force due to the Affordable Care Act — then real tax reform could have even more powerful effects on the economy.

Chairman Camp, it is not too late. With our economy in its current state, it is worth a try. Give us another tax bill, with real tax cuts.

 

Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, directs Economics21 at the Manhattan Institute. You can follow her on Twitter here.

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