There was only one detailed tax reform plan introduced during this Congress, and Hill staffers of both parties are calling it a starting point for tax reform discussions in the next Congress. But there’s a huge problem. The plan, introduced by Rep. Dave Camp, is a $1.7 trillion tax cut for corporations and the wealthy.
Republican and Democratic congressional aides spoke at an event focused on tax reform two days after the midterm elections. Even the Democratic aides said that the plan, introduced by Camp, a Republican, addressed tax reform “in a revenue-neutral, responsible way,” and that the plan “was a great contribution to the discussion.” Here’s why they’re wrong.
Rep. Camp, the outgoing chairman of the House Ways and Means Committee, claimed that his plan would be revenue-neutral, meaning it would end some loopholes and breaks but use all the resulting revenue savings to offset reductions in tax rates. He also claimed that it would be distributionally neutral, meaning, for example, that the richest one percent of Americans would contribute about the same percentage of federal tax revenue as they do today.
These sound bites from Camp are extremely misleading. Citizens for Tax Justice studied the plan and concluded that they would be true only in the first decade after enactment, which is the typical period of time that Congress’s tax analysts examine for tax proposals. But Camp uses various timing gimmicks to ensure that the true costs of his plan would not appear until later, outside the window of time that lawmakers usually pay attention to. CTJ concluded that in its second decade, the Camp tax plan would reduce revenue by $1.7 trillion. That’s $1,700,000,000.
For example, the statutory corporate income tax rate would be reduced from 35 percent to 25 percent, but that would be phased in over a five-year period. Thus the full cost of this rate reduction would therefore not show up in the first ten years.
Another of Camp’s gimmicks involves changing the rules for well-off taxpayers who make voluntary extra contributions into their retirement plans. Camp would encourage or force people to put a large share of these contributions, which are currently deductible, into nondeductible Roth IRAs. These lost tax deductions are estimated to raise $230 billion over the first decade. But when people eventually withdraw funds from Roth IRAs, the withdrawals would be tax-free. So in the second decade, the change would lose almost as much revenue as it raised in the first decade.
It is possible that Democratic staffers complimented Camp’s budget-busting tax reform plan merely to contrast it to the far worse approach Camp and the rest of his party put forward more recently. The Republican-controlled House approved bills to make certain temporary tax breaks permanent without offsetting their costs and without addressing broader problems with the tax code. (More on that here.) These bills, the Democratic staffers argued, were a step away from tax reform. That’s true as far as it goes.
But the conversation at the tax reform event became more alarming when a moderator asked the aides how everyone on the Hill should think about revenue as the next Congress discusses tax reform. Should lawmakers choose a specific amount of revenue that should be raised, or should lawmakers agree to pursue a tax reform that is revenue-neutral? Even the Democratic staff discounted the importance of revenue, replying that lawmakers and their staffs should try to “get the policy right” without setting any revenue goal.
This approach to tax reform is outlandish. The point of the tax system is to raise revenue to pay for public investments and services. We need more of it.
Why We Need More Revenue
The U.S. is one of the least taxed of all developed countries. And Washington seems to suffer from amnesia about how our lack of revenue has hurt us recently.
To take just one example, no one seems to remember that in 2011 Congress declared a budget emergency and enacted the Budget Control Act, which imposes more than $100 billion a year in automatic spending cuts (sequestration) for several years. When sequestration went into effect, it cut into things that most Americans would say are investments in our future, cutting 600 medical research grants and eliminating 57,000 Head Start slots.
A last-minute deal in Congress partially undid these cuts for 2014 and 2015, but they will likely return in 2016, when sequestration will be fully in effect once again. It would be hypocritical and shortsighted for lawmakers to spend their time discussing a tax reform proposal that raises no new revenue (or one that loses revenue) even as they tell American families that the government cannot afford to provide early education, research or other basic investments in their future.