To make fun of big efforts that produce small results, the famous Roman poet, Horace, wrote “The mountains will be in labor, and a ridiculous mouse will be brought forth.”
That line sums up my view of the new tax reform plan introduced by Congressman Dave Camp, Chairman of the House Ways & Means Committee.
To his credit, Congressman Camp put in a lot of work. But I can’t help but wonder why he went through the time and trouble. To understand why I’m so underwhelmed, let’s first go back in time.
Back in 1995, tax reform was a hot issue. The House Majority Leader, Dick Armey, had proposed a flat tax. Congressman Billy Tauzin was pushing a version of a national sales tax. And there were several additional proposals jockeying for attention.
To make sense of this clutter, I wrote a paper for the Heritage Foundation that demonstrated how to grade the various proposals that had been proposed.
As you can see, I included obvious features such as low tax rates, simplicity, double taxation, and social engineering, but I also graded plans based on other features such as civil liberties, fairness, and downside risk.
There obviously have been many new plans since I wrote this paper, most notably the Fair Tax (a different version of a national sales tax than the Tauzin plan), Simpson-Bowles, the Ryan Roadmap, Domenici-Rivlin, the Heritage Foundation’s American Dream proposal, the Baucus-Hatch blank slate, and – as noted above – the new tax reform plan by Congressman Dave Camp.
Given his powerful position as head of the tax-writing committee, let’s use the 1995 guide to assess the pros and cons of Congressman Camp’s plan.
Rates: The Top tax rate for individual taxpayers is reduced from 39.6 percent to 35 percent, which is a disappointingly modest step in the right direction. The corporate tax rate falls from 35 percent to 25 percent, which is more praiseworthy, though Camp doesn’t explain why small businesses (who file using the individual income tax) should pay higher rates than large companies.
Simplicity: Camp claims that he will eliminate 25 percent of the tax code, which certainly is welcome news since the internal revenue code has swelled to 70,000-plus pages of loopholes, exemptions, deductions, credits, penalties, exclusions, preferences, and other distortions. And his proposal does eliminate some deductions, including the state and local tax deduction (which perversely rewards states with higher fiscal burdens).
Saving and Investment: Ever since Reagan slashed tax rates in the 1980s, the most anti-growth feature of the tax code is probably the pervasive double taxation of income that is saved and invested. Shockingly, the Camp plan worsens the tax treatment of capital, with higher taxation of dividends and capital gains and depreciation rules that are even more onerous than current law.
Social Engineering: Some of the worst distortions in the tax code are left in place, including the healthcare exclusion for almost all taxpayers. This means that people will continue to make economically irrational decisions solely to benefit from certain tax provisions.
Civil Liberties: The Camp plan does nothing to change the fact that the IRS has both the need and the power to collect massive amounts of private financial data from taxpayers. Nor does the proposal end the upside-down practice of making taxpayers prove their innocence in any dispute with the tax authorities.
Fairness: In a non-corrupt tax system, all income is taxed, but only one time. On this basis, the plan from the Ways & Means Chairman is difficult to assess. Loopholes are slightly reduced, but double taxation is worse, so it’s hard to say whether the system is more fair or less fair.
Risk: There is no value-added tax, which is a critically important feature of any tax reform plan. As such, there is no risk the Camp plan will become a Trojan Horse for a massive expansion in the fiscal burden.
Evasion: People are reluctant to comply with the tax system when rates are punitive and/or there’s a perception of rampant unfairness. It’s possible that the slightly lower statutory rates may improve incentives to obey the law, but that will be offset by the higher tax burden on saving and investment.
International Competitiveness: Reducing the corporate tax rate will help attract jobs and investment, and the plan also mitigates some of worst features of America’s “worldwide” tax regime.
Now that we’ve taken a broad look at the components of Congressman Camp’s plan, let’s look at a modified version of my 1995 grades.
You can see why I’m underwhelmed by his proposal.
Congressman Camp’s proposal may be an improvement over the status quo, but my main reaction is “what’s the point?”
In other words, why go through months of hearings and set up all sorts of working groups, only to propose a timid plan?
Now, perhaps, readers will understand why I’m rather pessimistic about achieving real tax reform.
We know the right policies to fix the tax code.
And we have ready-made plans – such as the flat tax and national sales tax – that would achieve the goals of tax reform.
Camp’s plan, by contrast, simply rearranges the deck chairs on the Titanic.
P.S. If you need to be cheered up after reading all this, here’s some more IRS humor to brighten your day, including the IRS version of the quadratic formula, a new Obama 1040 form, a list of tax day tips from David Letterman, a cartoon ofhow GPS would work if operated by the IRS, an IRS-designed pencil sharpener, a sale on 1040-form toilet paper (a real product), and two songs about the tax agency (hereand here), and a PG-13 joke about a Rabbi and an IRS agent.
[…] by class warfare concerns instead of focusing on how to produce growth. Indeed, this is why the plan put forth by the previous Chairman of the Ways & Means Committee was such a […]
[…] on the Titanic. For instance, back in 2014, the then-Chairman of the House Ways and Means Committee unveiled a proposal that – at best – was underwhelming. Shifts in the right direction in some parts of the […]
If I were grading these four in terms of international competitiveness, here are the grades that I would assign
FairTax (sales tax)………………… A+
VAT …………………………………… B
Flat INCOME tax (pick your favorite) …… D-
I don’t know enough about the others to grade them.
I know this is rather late to be commenting on this article, but I just came across it. I find Dan’s grading of the various proposals rather curious – and that is as polite and diplomatic as I can say it.
I note that he gives the sales tax, VAT and two forms of flat tax essentially the same grade: A or A minus. Of the proposals, only one takes the entire U. S. tax burden and puts it in a border adjustable form: the sales tax. A VAT which replaced all the other federal taxes would operate the same way. However, the problem is that everywhere the VAT is in operation, it is IN ADDITION to income taxes, not as a replacement for them.
Since a flat tax is still an income tax, it cannot be border adjusted. That means that if the US were to enact either of the two flat tax proposals graded here, they would remain the only OECD nation with no border adjustment mechanism in its system. That is a pretty stark contrast to the FairTax, which would move virtually the entirety of the US tax burden to a border adjustable form.
How that equates to all four being given roughly the same grade in this most critical category is beyond me.
[…] while working at the Heritage Foundation, I created a matrix to grade competing tax reform plans. I updated that matrix last year to assess the proposal put forth by Congressman Dave Camp, the former Chairman of the House Ways […]
[…] while working at the Heritage Foundation, I created a matrix to grade competing tax reform plans. I updated that matrix last year to assess the proposal put forth by Congressman Dave Camp, the former Chairman of the House Ways […]
[…] if lower tax rates are financed with increased double taxation (a major shortcoming of the Cong. Camp tax plan), then it’s unclear whether policy has […]
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[…] P.P.S. Want to know why the tax reform plan introduced by Congressman Dave Camp was so uninspiring, as I noted last week? […]
Dan, I read some of your IL now and then. I disagree with virtually everything you say. To me you’re talking some kind of false, perverse, pseudo capitalism!? You go on ad nausea about double-taxation!?
Instead of all the fair’s and flat’s and prebates etc; why not something like this?… Set all corporate tax down to 3%, or essentially nothing. Then treat all income, earned and unearned, as just “ordinary”. The only deducts would be muni-bonds and charitable donations. Inheritance and gift income might be capped at 15% tax or so?… Technically inheritance and gift should ‘not’ be taxed, but due to previous loopholes, you have to tax it a little.
Then eliminate that horribly destructive and anti-capitalistic practice of “artificially appreciating” our used homes, Dan, used assets don’t normally appreciate under a true, fair, moral, capitalist paradigm! Now of course, existing mortgage holders would keep their MID and property tax deducts.
The top individual bracket should not be higher than 35% or even 33%; but this “fewer brackets” will simplify the code is complete ruse. Back in my day, before pc computers etc, we had like 12 brackets!?
Even the former Fed Chair Bernanke ‘incorrectly’ talks about the benefits of inflated or appreciated home values!?? Dan, when you see in all our major cities that inner-city blight, that’s not true capitalism, sir. When you see a total collapse or sink-hole in affordable housing, for the lower-middle class, and young folk, that’s not true moral capitalism! You neo-cons and neo-caps need to quit calling everyone that disagrees with you, a commie socialist. I’m in my sixties, and I ain’t a socialist!
Not to be condescending Dan, but when your nation’s median income is far removed from the mean income; that’s not just some byproduct or consequence of free market capitalism. That’s an indicator your nation is ‘NOT’ practicing true, fair, level playing field, moral, free market capitalism!!!
That last question was a good one, Ned. At least Dan’s readers are reading them, so it is almost the same, right?
Dan:
Are you reading these comments?
Eliminating taxes on investment is a huge stumbling block to enacting a flat tax, with all the noise about income disparity.
To make the change politically palatable, I propose a “painless tax”.
This would be a one-time capital gains tax imposed the day before the zero rate goes into effect on all accumulated capital gains. Why would it be painless? Securities will go up in value by more than the cost of the tax. For example, if a stock is 80 with a 20% capital gains tax, its value should rise to 100 with no tax, since stock owners would own 100% of future proceeds verses 80%. A 20% one-time tax will always be less than the gain, unless the security has zero cost basis.
In order to really make it painless, the tax could be paid by reducing future Social Security payments, so there is no out of pocket cost except for the very wealthy.
The “territorial” approach creates big differences between an income based tax and a sales based tax. An income based tax gives a huge advantage to imported goods or components, since no US income based tax is embedded in the cost. This can be corrected by not allowing the cost of imports to be deducted for tax purposes.
A supposed advantage of a sales based flat tax is that exports will be more competitive, since no tax would be applied. This is great for producers but not so great for US consumers, since they would necessarily have to make up the difference created by subsidizing foreign consumers.
Dan:
You forgot to include my 10-25 Plan (you received my book, “Fixing Everything”), if you’re looking for straight A’s.
Regarding which Flat Tax, sales or income based, the answer is both. The best answer would be a progressive hybrid flat tax. It would include some form of prebate to make it progressive. It would be primarily income based, with modifications to allowable business expenses which would bring it in line with a sales based flat tax.
While we’re at it, the prebate should be subtracted from means-tested welfare and from Social Security payments, thereby getting rid of means-testing mal-incentives and setting the stage for private retirement accounts. Residual means-tested welfare should be state only, thereby eliminating 700,000 federal bureaucrats and ending class warfare through the tax code.