Rep. Dave Camp (R-Mich.), chairman of the House Ways and Means Committee, is out today with a comprehensive tax reform plan. It's a 979-page plan that, among other things, lowers marginal income tax rates, lowers the corporate tax rate, increases the standard deduction for individual and married couples, phases out certain tax breaks, consolidates other tax breaks, and reforms retirement savings plans. The estimated impact of all of these reforms, according to the Joint Committee on Taxation, will be more jobs, more economic growth, and a more progressive tax code.
The long-rumored simplification of the tax code is the central plank of the Camp plan. Rather than seven tax brackets, we'll now have three: 10%, 25%, and 35% - with the 35% rate kicking in on individuals who make more than $400,000 or couples who make over $450,000:
The plan also drastically ups the standard deduction that taxpayers take on their tax returns, to $11,000 for individuals and $22,000 for couples. This is functionally a tax cut for a lot of individuals - fewer people will have to itemize their deductions to save on their tax returns. The Joint Committee on Taxation's analysis estimates that fewer than 5% of Americans will have to itemize under this system. The Alternative Minimum tax is also eliminated under Camp's proposal.
When it comes to corporations, Camp proposes to cut the corporate income tax rate from 35% to 25% and eliminate certain corporate tax breaks, including the global taxation of corporate dividends. This would bring the American statutory corporate tax rate more in line with the rest of the developed world (it's currently the highest) and more in line with how other countries tax global income. All in all, the provisions of lowering the rate and broadening the base, the JCT finds, would increase corporate tax receipts by over $500 billion over ten years.
When it comes to investment taxes, the Camp proposal would tax capital gains and dividends at ordinary rates rather than a lower rate. This combined with the lowering of ordinary rates would result in a small hike in capital gains tax rates.
The JCT finds that tax reform on the whole would actually make the tax code mildly more progressive. Once all of the tax provisions are phased in, middle-class families would face the largest tax cut as a percentage of their income, while taxpayers at the upper end of the income distribution would see either a small tax hike or a small tax cut depending on the composition of their income. Here's how the JCT looks at the distributional impact of Camp's tax reform plan:
And, according to the JCT, Rep. Camp has largely kept his promise to keep tax reform revenue-neutral. The effect of every provision of his tax reform would be to raise federal revenues by $3 billion over the next ten years.
Where the analysis gets interesting is its economic effects. For all of the tax provisions and distributional effects, the JCT finds that this revenue-neutral tax reform will add jobs, stimulate activity and grow the economy. Private sector employment will increase between 0.4-0.7% - which sounds small, but when taking the entire economy into account, means an increase of up to 1.8 million jobs. At the optimistic end of the spectrum, Camp estimates that the tax reform will add $3.4 trillion to American GDP over the course of ten years. That's not small change.
The tax reform plan isn't all good. Equalizing the tax treatment of investment and labor income might be troubling, and the lowered caps on mortgage interest deduction will trouble a lot of people (such as Salem Radio's Hugh Hewitt). Charitable deductions will play a much smaller role in the tax code as well. On the whole, though, the long-sought Camp tax reform will do exactly as many Republicans promised: broaden the base, lower income tax rates, remain budget-neutral, increase economic growth, and reform the corporate tax code.
This could all be for naught, as John Boehner refused to announce if there will actually be a vote on Camp's legislation. But for now, tax reformers have a lot to be excited about.
Not So Fast: Americans Still Want Obama to Seek Congressional Approval for Iran Deal | Cortney O'Brien