e21 Asks: Comprehensive Tax Reform

Last week we asked e21 readers whether they supported House Ways and Means Committee Chairman Dave Camp’s tax reform proposal. Camp’s bill would simplify income tax brackets down to three from seven. It would lower America’s highest-in-the-world corporate tax rate

to 25 percent. However, the bill would also raise taxes on corporations through other methods, such as lengthening depreciation schedules, in addition to a tax on vaguely named “systematically important financial institutions.”

Overall, 62 percent of e21 readers were fully supportive of the bill. “It will boost economic growth” received 38 percent of the vote, followed by “it simplifies the tax code” with 24 percent. Another 15 percent showed moderate support for the bill, saying “it cuts some taxes but takes away some deductions.” Respondents opposed to the bill accounted for 23 percent of the vote, though they were opposed for different reasons. Sixteen percent said the bill does not cut taxes far enough, compared to seven percent who said it cuts taxes too much.

In 1986, President Reagan signed a Democrat-sponsored Tax Reform Act into law. The act was the last major simplification of the tax code. It decreased individual income tax rates, increased corporate taxes, and eliminated $30 billion in loopholes.

Since then, the tax code has slowly become more complicated and burdensome. A 2013 report by the Mercatus Center found the complex tax code costs Americans nearly $1 trillion a year in compliance costs. An income tax filer spends, on average, 41 hours and over $2,000 on complying with the tax code, in addition to the actual taxes paid.

Without a doubt, the tax code needs to undergo a dramatic simplification. But is Chairman Camp’s tax proposal the best way to simplify taxes?

E21 director Diana Furchtgott-Roth is among those saying Dave Camp’s tax plan does not go far enough.

Camp’s plan is an adequate start to individual income tax reform. While it is an improvement on the status quo, Camp should have proposed two income tax rates, 10 percent and 25 percent, rather than adding a third rate, a 35 percent rate on top-earners. The 35 percent rate would hit many small businesses that file as individual income taxpayers and discourage work, risk-taking, and investment among top earners..

On the corporate side of the tax code, Camp’s plan would actually increase taxes. Corporate tax payments would rise by $562 billion over the next ten years, with taxes on multinationals rising by $68 billion. The lengthening of depreciation schedules would limit write-offs for capital, leaving corporations with less money for investment and hiring. A better approach would have gone in the opposite direction and allowed businesses to write off, or expense, capital as it is purchased to encourage more capital investment.

The Camp tax plan justifiably repeals Obamacare’s medical device tax. The medical device tax doubles the industry’s tax burden, encourages exporting firms to locate offshore or expand offshore facilities, and disadvantages patients in need of prosthetics, pacemakers, and other life-saving devices.

The Joint Tax Committee’s economic models predict that Camp’s plan could create nearly two million private sector jobs and increase GDP by $3 trillion. The Tax Foundation questions these results, finding that the Committee did not sufficiently account for the decline in investment due to higher effective marginal tax rates on capital. Economic and job growth resulting from Camp’s proposal would be higher with immediate capital expensing and flatter income tax rates. 

Camp’s proposal is a start in what is sure to be the long process of reforming America’s tax code. With employment still 650,000 jobs below the level in December 2007 and GDP growing at an unacceptable 2.2 percent, America has little time to waste.