How do you reform a federal tax code with more than 70,000 pages of mind-numbing text?
You start with a 979 page “discussion draft” of legislation drafted by the House of Representatives’ tax-writing Ways and Means Committee, chaired by Representative Dave Camp. “The Tax Reform Act of 2014” addresses both the personal and corporate income tax codes.
Released after three years of Committee hearings and widespread consultation, Congressman Camp’s initiative deserves kudos from anyone concerned about the complexity, subtle corruption and massive inefficiencies that have crept into our federal tax system since 1986.
There is something for everyone in those 979 pages – to like and to dislike. In other words, the proposal follows the dictum “good budgeting is the uniform distribution of dissatisfaction.” At the same time, it is designed to be “revenue neutral.” If all proposals were adopted, there would be no increase or reduction in tax revenues.
However, this does not take into account the positive economic impact that a “simpler, flatter, and fairer” tax code could bring. The Committee claims that the package would result in a measurable positive impact on economic growth and 1.8 million new jobs over a ten year period.
Here are a few of the proposals that most people will like:
- Personal income tax
o Substantial increases in the standard deduction will permit 95% of taxpayers to avoid itemizing deductions – and save on tax preparation expense and time.
o The existing seven tax brackets are reduced to three brackets of 10, 25, and 35 percent, effectively reducing marginal rates somewhat.
o The alternative minimum tax is repealed.
- Corporate taxes
o The corporate tax rate declines from 35% to 25%.
o Foreign profits are, in general, exempt from U.S. tax.
o The research and development tax credit is made permanent.
o Small businesses are allowed to expense up to $250,000 in equipment and similar outlays.
Here are a few of the many proposals that a lot of people will dislike and special interest lobbyists will mobilize to kill:
- Personal income tax
o Deduction for state/local and property taxes eliminated.
o Only charitable contributions in excess of 2% of income are deductible.
o Interest on new home mortgages deductible only up to the first $500,000 of principal.
o Tax-exempt private activity bonds – a pernicious form of crony capitalism – are abolished.
o “Carried interest” earned by hedge fund types treated as ordinary income, not as capital gains.
- Corporate taxes
o Loopholes that allow nonprofit organizations (e.g. AARP) to avoid tax on commercial activities are closed.
o Tax exemptions for professional sports leagues, e.g. the NFL, a $9.5 billion a year business, are eliminated.
o Alternative energy credits are eliminated.
o An excise tax (0.035%) on big financial institutions, e.g. with over $500 billion in total consolidated assets, is put into the code.
o Large tax increases for the fossil fuel industry result through changes in IRS-allowed accounting rules.
Personally, I could buy the package, at least as outlined above. That includes the excise tax on “too big to fail” institutions, since it would help discourage banks from getting too big in the first place, along with the tougher requirements for bank capital in Dodd-Frank legislation. .
For the most part, the package is an artful combination of economically sensible reforms and politically astute compromises. Purists will not like it; pragmatic observers should support it.
The interested taxpayer can read the excellent 32-page executive summary in layman’s English on the Committee’s website. If you don’t have time to read the executive summary, try the excellent article in Forbes, which also contains pertinent commentary.
Prospects? Passage of a massive reform bill in 2014 is not in the cards. But first steps in that direction are possible, especially in the corporate tax code, where the technical work and trade-offs have been thoroughly researched and published. And if a Republican majority was returned in the Senate after November’s elections, maybe a worthy successor to the bipartisan Tax Reform Act of 1986 would emerge in 2015.
If you think the tax code is “a broken mess” as Congressman Camp does, give him a hand by writing your Senators, Congressional Representative and local newspaper in support of The Tax Reform Act of 2014.