Nation & World

February 26, 2014

GOP chairman offers tax-code revamp, chances slim

Despite lukewarm embrace from party leaders, the Republican chairman of tax-writing House Ways and Means offers a plan for the first overhaul of tax code since 1986.

Facing long odds, the chairman of the tax-writing House Ways and Means Committee on Wednesday proposed the first complete overhaul of the tax code since 1986.

“This legislation does not reflect ideas solely advanced by Democrats or ideas solely advanced by Republicans,”said Rep. David Camp, R-Mich., in a news conference detailing his comprehensive plan.

The plan, he added, “recognizes that everyone is a part of this effort and can benefit when we have a code that is simpler and fairer.”

The plan narrows seven current tax brackets into just two. Individuals earning less than $37,400 would pay a 10 percent tax rate, as would joint filers with income below $74,800. Everyone else would pay a 25 percent rate.

The plan is said to cost about $590 billion in lost tax revenue from individual tax payments over a 10-year period, but when taken in its entirety it would raise about $3 billion on net more in tax revenue over that same period, a small sum in an economy the size of the United States.

In a bid to entice Democrats, who insist on higher taxes on the wealthy, the plan would have a 10 percent surcharge on individuals with adjustable gross income above $400,000 and joint filers above $450,000. It also reduces how much of mortgage interested can be reduced if a new home loan exceeds $500,000, and ends the ability to deduct state and local taxes from a federal return.

The Camp proposal also lowers the corporate tax rate to 25 percent, in a phase in that reduces the rate by 2 percentage points a year through 2019.

It would return the tax rate on capital gains, now at 20 percent, to the rate of ordinary income, which for most Americans would become 25 percent. But about 40 percent of capital gains and dividends could be excluded from taxation under the proposal.

There were enough Democratic ideas in the 979-page draft legislation that the top Democrat on the tax-writing committee, Rep. Sander Levin of Michigan, was welcoming of the proposal.

“Chairman Camp’s tax reform proposal opens up a discussion that Democrats have wanted to engage in on a bipartisan basis,” he said in a statement. “It must produce a fairer and more adequate tax code for all Americans, ensuring that wealthy individuals and corporations pay their fair share while preserving our long-term economic security in a fiscally responsible way that promotes jobs in the United States.”

Rep. Chris Van Hollen of Maryland, the top Democrat on the House Budget Committee, was similarly open to the Camp proposal.

“While I commend the chairman for offering a comprehensive proposal, we need to thoroughly understand the choices this proposal makes, the consequences those choices have for America’s families, and their impact on our nation’s long-term fiscal health,” he said.

Even before Camp released the document, Republican leaders were clear-eyed about its chances. Senate Minority Leader Mitch McConnell, R-Ky., said Tuesday it had “no hope” for passage this year. Then just hours before the plan’s release, House Speaker John Boehner, R-Ohio, was equally glum in stressing it was not a leadership plan.

“You're getting a little bit ahead of yourself,” he told a reporter who asked if could be called a GOP plan. “The chairman's going to outline a discussion draft to start the discussion about tax reform. We all know our tax system is broken.”

Speaker Boehner did favor the idea of collapsing tax brackets.

"To bring down rates, you clean out a lot of the garbage that's in there and the special interest issues that are in there. And so I think we ought to have a real conversation about this, and this is the beginning of that conversation," Boehner said of the Camp proposal.

And special interest groups reacted quickly to the Camp plan. The Private Equity Growth Capital Council, representing well-heeled private-equity firms, issued a statement before Camp even released his plan, which calls for rolling back existing tax law that allows the managers of these firms to have their earnings taxed not as wages but at the lower rate of investment income.

“Last year, private equity invested over $400 billion dollars in thousands of businesses of all shapes and sizes across all 435 congressional districts,” the group said in a veiled reference to donations made to House campaigns. “This is why it is so disappointing that Chairman Camp chose to single out private equity, real estate, and venture capital investment by exacting a 40 percent tax increase that will discourage new investment.”

The biggest obstacle to the plan is Washington gridlock. Democrats want tax-reform to raise revenue to allow for investment in education, infrastructure and other areas. Camp and fellow Republicans insist on a revenue-neutral approach.

“The (Senate) majority leader and the president have said they want a trillion dollars in new revenue for the federal government as a condition for doing comprehensive tax reform, which we know we ought to do," Minority Leader McConnell told reporters on Tuesday. The proposed revamp of the tax code would also change the way high-income earners can save for retirement. That by restricting them to Roth-style retirement accounts that use after-tax income as opposed to pre-tax income, as is the case for conventional 401 k retirement plans held by many working Americans.

This change would affect 5 percent of the workforce, Camp said, and involves those who set aside more than $8,750 a year in tax-deferred accounts such as 401k plans and Individual Retirement Accounts, or IRAs.

There’s less to that idea than it appears, cautioned Len Burman, a nationally recognized tax expert and professor at Syracuse University.

“At best it’s just a timing gimmick. It’s a shift in the timing of revenue. It looks like we collect more right now, but we’re giving up more in the future,” he said.

That’s because conventional retirement accounts are taxed upon withdrawal in retirement, when we there’s a large pot of money because of compounding gains. Roth IRAs involve after-tax income, sort of paying future taxes up front.

They’re used to shelter income and lower estate taxes because they can be left alone and passed on to beneficiaries such as children after the account holder dies.

“Roths are really advantageous for super wealthy people, who are the people I have the fewest concerns about when it comes to retirement savings,” said Burman.

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