Lower tax rates? Not really. The outgoing chairman of the House Ways and Means Committee, Dave Camp (R-Michigan), put forth on Wednesday his proposal for a simplified tax code. Like any broad tax reform plan, Camp's plan contains much for both Democrats and Republicans to embrace and much for them to oppose. The effects on individuals would vary, though congressional analysis does indicate the tax hit to high-, middle-, and low- income groups would be virtually the same.
Congress – which means both Republicans and Democrats – has already let several valuable tax provisions lapse, including accelerated depreciation and the research and development credit. This is a form of a tax increase across all tax brackets. When a change is made to lower a tax rate but is offset by the elimination of a deduction, the effective rate paid doesn't really change much. The process might be simplified, but the end result is the same.
In any case, here are the basic elements of Camp's plan.
Lower rates: Currently there are seven individual income tax rates ranging from 10% to 39.6%. Camp would reduce them to three: 10%, 25% and 35%. The highest bracket would essentially apply to the income that today is subject to the 39.6% bracket -- income over $400,000 for singles and $450,000 for married couples filing jointly. But many tax breaks, such as the one workers get for employer contributions to their health coverage, would only be allowed against income up to the 25% bracket. Therefore, their total value would be reduced or even eliminated for very high-income filers. In addition, because of a complex formula, high earners would lose at least some of the benefit of having their first dollars taxed at 10%. And not all high income would be subject to the 35% rate. Some income from certain types of domestic manufacturing, like farming and oil drilling, would only be taxed at 25%.
Higher standard deduction: Camp’s proposal would raise the standard deduction to $11,000 for individuals and $22,000 for (married, filing jointly) couples. The net result would be fewer taxpayers who itemize their deductions, thereby simplifying the tax filing experience, as the vast majority of filers would only have to file a basic IRS 1040A form. The standard deduction would phase out for high-income filers though.
Increased child tax credit: The per-child tax credit would increase to $1,500 (currently $1,000) and would be allowed for kids up to the age of 18, versus 17 today. This credit would also phase out for very high income filers.
Reduced mortgage interest deduction: The mortgage interest deduction currently is allowed on mortgages up to $1 million. Under Camp's proposal the cap would be lowered to $500,000. The plan would also place new restrictions on the tax-free gains homeowners enjoy when they sell their homes.
Elimination of state and local income tax deduction: Taxpayers currently can deduct their state and local income taxes on their federal returns. That would no longer be allowed under Camp’s proposal.
Change in taxation of long-term gains: Camp proposes taxing 60% of capital gains at ordinary income tax rates and excluding the other 40% from tax. For many people, that would mean a virtually identical tax bill. Consider $100 in capital gains. A person in the 25% bracket in Camp's plan would pay 25% on $60, or $15. $15, essentially, is a flat 15%, what most Americans currently pay on their gains. But the bill for filers subject to Camp's 35% rate would be slightly higher. Today, they pay a flat 20% rate (owing $20 on gains of $100). Under Camp's proposed formula, they would pay 35% of $60, or $21. On top of that they would also owe the new 3.8% Medicare tax on investments, which Camp's plan leaves in place.
New bank tax: "Too big to fail" financial institutions would pay a quarterly tax of 0.035% on assets in excess of $500 billion, raising more than $86 billion over 10 years.
Change in how investment managers are taxed: Managers of private equity, including venture capital funds, are often paid "carried interest" as part of their total pay. Carried interest represents a share of profits from investment funds. But the managers currently only have to pay the 20% capital gains tax rate on it, which is lower than the ordinary income tax rate. Under Camp's plan, at least some types of carried interest would be taxed as wage income.
A simplified code and pared back taxes for individuals and businesses, Camp claims, are what’s needed to get the economy moving. He might be right, but the timing of this is particularly odd. With midterm elections this November, and Republicans on the hunt for Obamacare, no one expects tax reform to happen this year. Most Republicans, in fact, already concerned about complaints they’re targeting scores of popular tax breaks, are distancing themselves from Camp’s plan. House Speaker John Boehner called the plan only “the beginning of [a] conversation.” That kind of response is not what’s needed to get Camp’s plan to the floor.
Personally, I don’t this this proposal stands a chance. Tax reform is a key issue for the Republican platform; Republicans have long-standing promises to slash individual and corporate tax rates. But cutting sacred cows like the mortgage interest deduction and downsizing the earned income tax credit (EITC) is a tough battle to fight. Camp’s plan, despite all this attention, is not an official bill, and I highly doubt it will become one. There are no plans to put his proposal to a vote, even in the Ways and Means Committee he currently chairs. But what this does signal, potentially, is the beginning of discussion over the pros and cons of our complicated tax system. I have no doubt Republicans will pick up the tax reform fight in 2017 -- after Obama’s departure and, potentially, more congressional seats. For now, we need to focus on what’s in front of us and work within the regulations currently in place.
