Chairman Dave Camp’s tax plan: The end of the beginning?
WHITE PAPER |
Substantial credit is due to Rep. Dave Camp (R. MI) for introducing on Feb. 26, 2014, a detailed plan (the Camp Proposal) for comprehensive tax reform, complete with draft statutory language, technical explanations and official revenue estimates. As chairman of the House Ways and Means Committee, Camp was able to call upon the resources of that committee, along with the influential staff of the Joint Committee on Taxation (JCT). Most importantly, the JCT economists have certified the Camp Proposal as being revenue-neutral and as not substantially altering the distribution of the federal income tax burden among different income groups. Although it may be argued that a true reform of the tax law should not be constrained by such limitations, a plan that is not revenue-neutral, or that shifts tax burdens among income classes the way a national sales tax, value-added tax or flat income tax might, will not be given serious consideration by Congress.
To quote Winston Churchill, “this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” Because the Camp Proposal has already been scored by the JCT economists, it will likely become the new baseline for tax reform discussions. Members of Congress and industry groups with other views of the ideal tax code may well begin to refer to their alternatives as being just like the Camp Proposal, except for the provisions they find objectionable. For that reason alone, it will be important to understand this new baseline for future tax reform discussions. In addition, of course, the Camp Proposal provides a preliminary list of the special preferences, exclusions and deductions potentially on the chopping block.
In the broadest possible terms, the Camp Proposal would:
- Preserve the current structure of a progressive individual income tax by collecting about 46 percent of all federal taxes, including payroll taxes, from individuals with incomes above $200,000, making modest simplifications to the complex system of exemptions, phase-outs, alternative minimum taxes and similar provisions that plague individual tax planning and preparation, and reflecting a top individual tax rate of 35 percent and a top rate on capital gains and qualified dividends of approximately 21 percent (not including the 3.8 percent tax on net investment income).
- Repeal the deductions for nonbusiness income, property and sales taxes paid to states and localities and limit the deduction for mortgage interest to the first $500,000 of loan principal, provisions that could have substantial adverse effects on individuals living in high-cost states.
- Lower the tax rate on corporate income from 35 percent to 25 percent, while imposing the same maximum 25 percent tax rate on qualified domestic manufacturing income earned by individuals operating through sole proprietorships, partnerships or S corporations.
- Expand the corporate tax base to certain publicly traded partnerships, but make no other major changes to the ability of non-publicly traded enterprises to elect corporate or pass-through status.
- Repeal or reduce such major business tax benefits as accelerated depreciation, the last-in, first-out (LIFO) method for inventory, the full deductibility of certain advertising expenses, the deduction for domestic production activities and many industry-specific provisions and, in the process, repeal the corporate minimum tax.
- Make major changes to the treatment of income earned overseas by U.S. companies, ostensibly making it less costly to earn income abroad that is intended to be repatriated to the United States, but more costly than under current law for companies that plan on reinvesting their foreign profits overseas.
- Retain the Affordable Care Act’s 0.9 percent surtax on certain compensation and 3.8 percent surtax on net investment income intact, but repeal the medical device excise tax.
A more detailed explanation of the key provisions follows. As always, taxpayers should evaluate the potential impact of the Camp Proposal, because whether the provisions augment or diminish the tax burden in a given situation will depend on the taxpayer’s specific facts.