Yesterday, Dave Camp, the Chairman of the House of Representative’s Ways & Means Committee offered up an astounding 979 page tax reform act. Much of the proposal is individual related; much of the proposal is business related. Today, thoughts on the individual tax reform proposals.
There are some great elements in Mr. Camp's plan, but the impact on the economy, housing and education make the proposal as offered a non-starter. The elimination of the state and local tax deduction, which this author favors to the dismay of some of many, equalizes federal taxes for taxpayers in different states who itemize. Unfortunately, the number of individuals who would see a tax increase as the result of this change makes the idea politically very, very difficult.
This author has been writing and speaking in favor of the following parts of Mr. Camp's plan for more than a decade:
· The substitution of partial taxability of capital gains and dividends rather than a lower tax rate,
· the elimination of personal exemptions,
· the elimination of the state income tax deduction,
· the elimination of the alternative minimum tax, and
· the elimination of the roof on itemized deductions
These changes would result in taxpayers making a single, easy calculation of tax rather than the required current multiple calculations needed because of different tax rates for different types of income and the required calculation of the alternative minimum tax. These changes would make it possible for most Americans to prepare their own tax returns. (This becomes particularly important as Mr. Camp proposes to eliminate the deduction for tax preparation fees.) The totality of these changes can be made tax neutral by reducing tax rates, which Mr. Camp's three rate system attempts to do.
The elimination of a potpourri of tax credits that virtually no one understands (particularly those who theoretically are entitled to these credits) also makes great sense.
All good so far, however, there are far too many game misconduct penalties in Mr. Camp’s proposal. Some of his proposals would cause far too much harm to far too many taxpayers.
The lessening of the interest deduction limitation to interest on new mortgages to no more than $500,000 could simultaneously destroy the dream of home ownership for tens of millions of taxpayers while driving down the value of virtually every existing home in America. With a lid on the deductibility of interest on loans of more than $500,000, there would be a cascading down of reduced home values for all houses, not just homes with mortgages of $500,000 or more.