New TPC Analysis: What Dave Camp's Tax Reform Plan Would Really Mean

By :: July 8th, 2014

In an extensive new analysis of House Ways & Means Committee Chair Dave Camp’s tax reform plan, my Tax Policy Center colleagues confirm his proposal would raise about the same amount of money over 10 years as current law and impose roughly the same tax burden across income groups as today's revenue code.

TPC also concluded that Camp’s proposals to eliminate many tax preferences for both individuals and businesses would simplify tax filing and eliminate many economic distortions produced by today’s law.

However, TPC found that while the plan is revenue-neutral within the 10-year budget window used by Congress, its long-run effects on revenues are “highly uncertain.” The congressional Joint Committee on Taxation estimated that the plan would raise about $3 billion more than current law between 2014 and 2023.

Soon after Camp released his plan last February, TPC analyzed many individual provisions but this is the first time it modeled the entire package.

Camp’s plan would collapse individual income tax brackets from six to three—10 percent, 25 percent, and 35 percent--and repeal the Alternative Minimum Tax. It would  boost the standard deduction but eliminate the personal exemption and repeal or limit most itemized deductions. It would substantially revise tax subsidies for low income households with children and make major changes in tax-preferred retirement savings.

Tax brackets and other parameters would continue to be indexed. But Camp would use the method known as chained CPI, which generally rises more slowly than the current inflation measure.

For business, Camp would lower the corporate rate from 35 percent to 25 percent and repeal the corporate AMT. While he’d retain the basic structure of the U.S.’s current worldwide tax system, Camp would sharply lower the tax multinational firms pay on dividends they receive from their foreign subsidiaries.

He’d also slow tax depreciation, tighten accounting rules, and eliminate many other business tax preferences.

When Camp first released his plan, many analysts questioned whether it would lose substantial revenue after the first 10 years. However, TPC could not determine whether Camp’s plan would increase or lower tax revenues over the long run.

Several provisions would result in one-time revenue gains that would not continue after the first 10 years. Two of the biggest changes would increase contributions to Roth-type retirement savings plans—a step that would boost revenues in the short run but cost the Treasury billions of dollars in the long term as people withdraw their savings tax-free.

But those long run revenue losses may be at least partially offset by other provisions. For instance, by changing the way the tax code is indexed for inflation, Camp would boost revenues compared to current law.

While TPC finds the tax burden across income groups would be roughly the same under Camp’s plan as today, his proposal would create a complex set of winners and losers.

For instance, many single parents who now file as heads of household would pay higher taxes even as joint and single filers would receive a tax cut on average across all income groups. The reason: Camp would repeal special Head of Household filing status. He’d also increase taxes for families with older children by tightening eligibility for certain refundable tax credits.

The plan would also change economic incentives in important ways. It would lower effective marginal tax rates for wages and interest income across all income groups but raise effective marginal rates on capital gains and dividends for all households except those in the top 20 percent. That group would enjoy a generous cut in effective rates for such investment income.

Camp’s plan is comprehensive, extremely detailed, and—above all—serious. He and his staff reviewed the entire code, throwing out or revising provisions they thought don’t work or could be improved.

They made literally hundreds of judgments. Many are at least debatable. Some are too gimmicky for my taste. But overall, Camp—who is retiring from Congress—designed a tax reform that passes the credibility test. And while it was summarily dismissed by Camp’s own GOP House leadership and ignored by most Democrats, I suspect much of what he designed will find its way into the nation’s next tax reform.

Camp did the nation an important service.

9Comments

  1. Vivian Darkbloom  ::  4:37 pm on July 8th, 2014:

    I’m not aware of any major tax reform proposal that is not subject to major uncertainty as far as forecasting the effects.

    But, if Howard is right that this plan would simplify tax filing, be neutral in its distributional effects and raise another $3 billion, it sounds like the best plan on the table.

    This bit of Gleckman’s analysis is misleading: “(The plan) would lower effective marginal tax rates for wages and interest income across all income groups but raise effective marginal rates on capital gains and dividends for all households except those in the top 20 percent.”

    It is misleading because middle class investors will benefit from the corporate rate tax cuts and other corporate reforms. They currently bear part of the burden of this tax. The net effect on middle class investors should be positive. Labor, which also bears part of the burden of corporate taxes, should also benefit,

    Anyone opposing this will have the burden of proof to convince me this is not a good deal.

  2. AMTbuff  ::  8:03 pm on July 8th, 2014:

    I oppose any “reform” which continues, let alone expands, the use of hidden marginal tax rates. Hidden tax rates are a cheat.

    If the government wants us to report our income honestly, we deserve an honest tax rate schedule.

  3. Michael Bindner  ::  3:14 am on July 9th, 2014:

    Camp wrote a tax reform that will get an A from the experts, from JTC to TPC. Its staff is well read enough to pull together a classic tax reform proposal and convince the Chair of the rightness of such a venture. Aside from that, it is not worth doing – but is probably the best a Republican Ways and Means chair could do.

    What would make reform worth doing is combining it with entitlement reform (in a way the GOP would not like) – equalizing the employer contribution to Social Security OASI while eliminating the cap (and getting rid of all other tax breaks for savings) – possibly even doing consumption tax funding – a VAT for continued government funding and a VAT like net business receitps tax for insured personal retirement accounts (GOP likes) holding employer voting stock (socialists like, GOP does not). Until more success stories get out on this type of organization – some detailed by Gar Alperowitz, this pro-worker reform won’t happen. The other necessary reform is to increase th child trax credit to living wage levels – about $1000 per month – with states funding half the bill and administering the net business receipts tax (which they would piggy back on and benefit from).

  4. Vivian Darkbloom  ::  3:30 am on July 9th, 2014:

    AMT,

    The Camp plan does continue, in a few respects, the phase-out of deductions, etc., which has the effect of “hiding” the marginal income tax rate. However, I fail to see how it expands the practice.

    For example, far fewer taxpayers would be subject to an AMT calculation. Under the Camp plan, tax is calculated on MAGI for incomes of $400K and $450K. He’s eliminated the phase-outs on personal exemptions (there are none) and on itemized deductions.

    The plan isn’t perfect; but, I think it would be a mistake to oppose it simply because it is not.

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