The proposal offered by House Ways & Means Chairman Dave Camp (R-MI) represents progress on behalf of a simpler and less burdensome tax system. Taxpayers should be largely encouraged by the plan. At the same time, it contains a number of provisions that require refinement and steps need to be taken to improve on the blueprint.
At 194 pages, that blueprint, in the form of a discussion draft, will require further exploration (and explanation) to determine how the final structure of a new tax system should be built. That’s to be expected when making so many changes to a body of tax law and regulations that numbers into the tens of thousands, rather than 194, pages. Nonetheless, NTU’s initial review shows the plan has strengths as well as weaknesses. Let’s start with the positive:
- Reducing the current seven income tax rates into three – 10, 25 and 35 percent. This would flatten the Code substantially and result in a tax cut for many Americans. While this is a very good step in the right direction, it would be preferable to move to a simpler single rate structure, either in the form of a flat income tax or a consumption tax. Further, the top rate of 35 percent would be too high. The proposal also recommends an unnecessarily complicated phase-out of the benefits of the 10 percent rate for taxpayers with incomes exceeding $250,000 for single filers and $300,000 for joint filers.
- Expanding the standard deduction from $6,100 to $11,000 for individuals and $12,200 to $22,000 for married couples filing jointly. This will allow millions of Americans to utilize this deduction rather than filing an itemized return – a change that could ease the 6.7 billion-hour, $240 billion NTU identified in its most recent “Taxing Trend” study.
- Eliminating two harmful tax increases implemented as part of the Affordable Care Act: the 2.3 percent medical device tax and the “medicine cabinet tax,” which restricts the usage of tax-free health accounts such as Health Savings Accounts. Numerous reports suggest that medical device manufacturers have already begun laying off some employees due to the $29 billion tax on their products.
- Moving to a flat corporate income tax structure with a rate of 25 percent. Given that our current top rate is the highest in the industrial world, this change would make our businesses more competitive internationally by bringing our rate down to a more reasonable level. Research by the Tax Foundation shows that a 25 percent rate would expand economic output and create 391,000 full-time jobs.
- Blocking implementation of a new IRS rule that would effectively silence many of the activities of citizen activist groups. This is critical to ensuring that groups like NTU – and more importantly, the taxpayers we represent – are well-informed and engaged in the important policy debates in Washington, DC.
- Simplifying of education tax credits by consolidating four existing credits into one – the American Opportunity Tax Credit. This change would help reduce complexity and clarify eligibility standards.
- Repealing the onerous individual and corporate Alternative Minimum Tax (AMT), which still penalizes far too many middle- and upper-income families. While Congress has periodically “patched” the AMT – most recently with the American Taxpayer Relief Act of 2012 – the best solution for the AMT is simply to get rid of it altogether, a remedy repeatedly recommended by the IRS National Taxpayer Advocate. In a recent report, the Advocate wrote that the AMT “corrodes both the tax system and the democratic process.”
- Simplifying tax returns the right way, by creating a streamlined 1040SR form for seniors while avoiding the dangerous “return-free” scheme that would allow the government to predetermine liabilities on tax forms and send them out for intimidated taxpayers to “review.”
Not surprisingly, the Chairman’s proposal is far from perfect. Several flaws to the design will need to be addressed going forward:
- Switching from Consumer Price Index (CPI) to chained CPI for the purposes of indexing tax brackets. This would likely result in “bracket creep,” in which wage growth exceeds the pace of bracket increases, thus causing individuals to move into higher tax brackets more quickly. This would create “stealth” tax increases for many Americans, and is especially problematic given that policymakers seem reluctant to apply chained CPI to federal benefit program adjustments that cost taxpayers billions annually.
- The schedule of phase-outs for certain deductions and credits. For instance, the Section 199 deduction for manufacturers would be wound down from 9 percent (6 percent for oil and gas) today to 3 percent for all industries in 2016. At that point the top corporate income tax rate would still be 31 percent. By 2017, the deduction would be eliminated, yet the rate would be set at 29 percent. The lower, 25 percent corporate tax rate would not take effect until 2019, which means many businesses could experience substantial tax increases during the phase-in period. Discriminatory taxes. Thankfully, several of the Obama Administration’s bromides were kept out of this plan – such as stripping only the oil and gas industry of Section 199 or taking away cost-of-business write-offs that have equivalents in other sectors. Nonetheless, Congress needs to more carefully evaluate some of proposal’s changes that could adversely affect job-creating sectors at a time when our economy needs a boost more than ever before. Getting rid of provisions like “percentage depletion” and “LIFO” accounting may seem like mere house-cleaning at first glance, but they actually mean large increases in tax burdens as well as major shifts in business models. National Taxpayers Union will soon have more to say on this.
- Parity between small businesses and traditional corporations. Businesses classified as pass-through entities or S-corporations pay taxes on the individual schedule and could therefore be subject to a top marginal rate of 35 percent, which is higher than the proposed corporate rate of 25 percent. This potential problem is partially ameliorated by exempting qualified domestic manufacturing income from the 35 percent rate.
Chairman Camp has undertaken a monumental task in a thoughtful, forthright manner, for which he deserves a lot of praise. Wherever they stand on the particulars, taxpayers should welcome the beginning of the serious, methodical debate that this proposal ought to engender.