The Republican Party is often defined by its promotion of an income tax that is based on a flat tax. Taxpayers, at all income levels, would pay the same percentage in tax; no more singling out high-income earners for a higher rate.
But that oversimplified and unworkable extreme is in contrast to the proposed tax reform put forth last week by the Republican chairman of the House Ways and Means Committee. Rep. Dave Camp’s proposals include tax-code changes which would involve low-, middle- and high-income levels and corporations. Unfortunately, the leadership of both political parties have said that the proposal from the Michigan Republican is not going anywhere.
That is not how to reform the cumbersome tax code, which has not had a significant rework since 1986.
Appealing to Democrats, big banks would pay a new tax on assets. The interest on mortgages above $500,000 would be eliminated (interest is now deductible on a mortgage up $1 million), and capital gains would be taxed at the ordinary income rate after excluding the first 40 percent. Those in the highest income-rate categories receive a significant portion of their income from capital gains, which come from stock-market trades and are currently taxed at 20 percent, or half the highest income rate of 39.6 percent.
And hedge-fund managers, who are able to pay only the capital-gains rate on their hedge-fund fee earnings, would be taxed at the income rate. Again, they would pay twice or almost twice what they do currently.
Gone, as well, would be the federal deduction for state and local taxes, which the wealthy are more likely to enjoy.
At the lowest income levels, individuals currently qualify for an earned-income credit, a payment from the federal government. That would go away under Camp’s new proposal, with an individual instead receiving a reduction in what was owed in Social Security and Medicare contributions.
Overall, the seven personal tax rates would be reduced to two, and the corporate tax rate reduced from 35 percent to 25 percent.
The highest rate for individuals and couples would be 25 percent, with those earning above $425,000 (couples $450,000) paying a 10 percent surcharge.
The plan from the chairman of the Ways and Means Committee is billed as being revenue neutral. No more, and no less tax revenue would result.
That revenue-neutral feature has killed the tax-reform proposal in the eyes of Democrats. That party wants an increase in tax revenue to be a part of any reform.
And in the Republican Party, as well as in the Democratic Party, leaders are fearful of the political damage that will come from being associated with any specific changes to the tax code that negatively impact an industry. The real estate community, for example, does not want the ceiling on the mortgage deduction to be lowered; significant homes in major cities are well more than $1,000,000.
There is plenty to question in the Republican proposal – mixing a payment resulting from a negative income tax with Social Security and Medicare obligations is a big one – but there are sufficiently thoughtful ingredients in this reform proposal to be worthy of serious discussion. It is a proposal that includes all income levels.
And, whatever the components of a tax overhaul, which is desperately needed, the changes are certain to be incomplete and will require further adjustments. That is the nature of major legislation. Rep. Dave Camp’s reform package is a very good start at a conversation about tax reform. It deserves to be receiving more attention than it is from both Republicans and Democrats.