David and Goliath

Ian - Dave Camp - Michael Jolley

Washington D.C. politics are at a stalemate. Both sides have dug into their ideological trenches,stocked up on rhetorical ammunition, and are ready for the biennial financial firefight that is the congressional midterm elections. But while the battle lines are growing rigid, one congressman has dared to break ranks and venture into no-man’s land. His name is David Camp (R-MI), and in February, he unveiled a bold new tax plan. It is not your typical red-blooded conservative wish list. On the contrary, his proposal is fiscally responsible, fair, bipartisan, and tackles some of the most uncontroversial problems in our 70,000-page tax code.

 

Instead of spending the last three years pontificating like some of his colleagues, Camp has used his time as chairman of the House Ways and Means Committee to double down on policy. First, he sets his sights on the corporate income tax. America’s national, state, and local corporate taxes cumulatively result in an average burden of 39.1%, the highest in the OECD. Although a labyrinth of loopholes makes the effective rate substantially lower, the U.S. taxes remain solidly higher than comparable countries’. As these nations continue to lower their rates in order to attract multinational business, the U.S. must keep pace to stay competitive.

 

But even if loopholes kept America on par with the international community (which they don’t), having an inconsistent corporate tax code comes with hidden costs. While a few large conglomerates can almost entirely eradicate their own tax burdens through creative accounting, different industries are treated in vastly unequal ways. In a paper for the National Bureau of Economic Research, analysts found that the average post-loophole rate is 31 percent for retailers, 30 percent for construction companies, 26 percent for manufacturers, 19 percent for real estate, and 6 percent for mining. Such uneven treatment creates arbitrary distortions in America’s economy, for example, inflating the costs of mining and retail. Furthermore, the Congressional Budget Office estimates that other flaws – like taxing income from capital, thereby discouraging investment – can disincentivize businesses from expanding as much as they otherwise would. Even according to the government itself, this is an absurd setup: the U.S. Small Business Administration is upfront about how such inefficiencies are “particularly [bad] for small businesses”, and many find it hard to plan for and comply with an expensive, convoluted tax code. These are just a few gems from a litany of bad provisions, and firms both big and small are pursuing a lot of expensive, counterproductive tactics to navigate all it all. Worse still, only select group of large, well-connected companies are succeeding.

 

It was this huge policy failure that gave rise to Camp’s corporate tax ideas. His “guiding principle is that everyone should play by the same rules—your tax rate should be determined by what’s fair, not by who you know in Washington” or whatever magic your accounting team can pull off. In order to equalize the environment for companies of all sizes, he would slash the top rate from 35% to 25%. To pay for this cut, Camp rolls back certain industry-specific tax breaks and reduces the rate at which businesses can write off depreciated capital. Most Republicans would never foray into the dangerous terrain of eliminating deductions, but Camp does not stop there. He slaps an additional tax on “too-big-to-fail” banks with assets in excess of $500 billion, eliminates exemptions for the oil industry, taxes profits earned overseas, increases the rate for capital gains income, and boosts infrastructure expenditures. All of that would surely please the Left.

 

Camp does not betray all of his conservative leanings; he cuts exemptions for green energy, retirement savings, and some low-income tax benefits like the Earned Income Tax Credit (EITC). This is part of the second big area of his tax reform: individual income. Camp takes the current seven-tier bracket system and reduces it down to two, with rates of 10% and 25%. To preempt the typical refrains about income inequality, he adds a 10% surtax for especially high earners – i.e. those making over $400,000 per year. That raises the top rate to 35 percent, hardly a draconian departure from the current 39.6 percent. Given the other deductions for high earners that Camp eliminates or extends to the middle class, as well as the slight capital gains increase, he is taking a measured, mild-mannered approach. His is the view of a policy wonk, not a politician.

 

Yet beyond all of the details, the congressman’s principal achievement is significantly simplifying the tax code. Reducing the “6.1 billion hours and $168 billion that taxpayers spend on return preparation [annually]” – as estimated by the IRS’ Taxpayer Advocate Service – is an eminently worthy goal. By losing the loopholes and reducing brackets, Camp largely achieves this objective. His efforts are all the more commendable in light of how evenhandedly he takes on the special interests of the right and left. While frustrating both, Camp operates largely on middle ground; he also adopts bipartisan recommendations for consolidating the myriad of education tax benefits, and creates one easy-to-implement credit. In the three decades since the last cohesive tax reform package, as thousands of caveats have been added, clear-cut mechanisms like this are increasingly hard to find. It is proposals like David Camp’s that go a long way to creating a streamlined revenue collection process.

 

The cherry on top of Camp’s plan is that it is deficit neutral: Nonpartisan economists working on behalf of the Joint Committee of Taxation have determined that this plan will neither add to nor detract from the debt over the next ten years. Wisely, Camp spurned hyper-partisanship and refused to concede to singular visions from either the Left or the Right. Instead he focuses on improving efficiency such that the joint committee projects his proposal will make the economy up to 1.6 percent larger. In turn, that growth would generate up to $700 billion more in revenue. Of course, his approach is certainly not perfect. Take the Earned Income Tax Credit mentioned earlier. Camp reduces funds for the EITC, which conservatives and liberals usually like because it is a welfare program that encourages work. Camp asserts that this program is riddled with fraud and should not be heavily relied upon, but insofar as that is true, it is still a strange target. Yet no tax reform can fully satisfy all parties during times of fiscal constraint. That Camp succeeds in aggravating both wings of the political spectrum is probably a positive sign that he is satisfying the middle.
But good policy aside, his plan is likely dead on arrival. Republicans will not back this measure for fear of angering their base, and Democrats will only commit if more revenue is raised. Nevertheless, it was brave of Camp to serve it up during a midterm year. Although his boldness has gone underappreciated, he has made a real dent in one of America’s greatest governmental dilemmas.

 

 
 
 

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