Roll Call: Latest News on Capitol Hill, Congress, Politics and Elections
February 10, 2016

Full Steam Ahead on Tax Overhaul, Thanks to Camp-Baucus Duo

The best news coming out of Congress recently — other than bipartisan work on immigration — is bipartisan work on a tax policy overhaul.

And it’s being conducted not by an ad-hoc “gang” — useful as those are when responsible leaders won’t act responsibly — but by the two people most in charge of the subject: House Ways and Means Chairman Dave Camp, R-Mich., and Senate Finance Chairman Max Baucus, D-Mont.

The two wrote a joint op-ed in The Wall Street Journal on April 8 committing themselves to producing overhaul legislation, which Camp’s office says he hopes will be out of his committee by the end of the year.

They appealed for public input by Tax Day, and Camp’s office said it received 1,300 submissions, the fruits of which are supposed to be analyzed by the Joint Committee on Taxation next month.

Now that Baucus has announced his retirement from Congress, presumably he has motivation to establish as part of his distinctly mixed legacy a wholesale repair of what he and Camp called a “broken” tax code.

As every taxpayer knows, the system is wretchedly complex. The legislators said it requires six billion hours of document work each year and more than $170 billion in expense for accountants and lawyers, or 15 percent of total tax receipts.

Moreover, as most taxpayers suspect, the system is wildly unfair, with some corporations and individuals escaping payment of any tax at all, with more than $400 billion a year less taxes being paid than are owed and with some industries paying a far lower tax rate than others. Mining, for example, averages 18 percent, while wholesale and retail trade pay 31 percent.

The tax system distorts economic decision-making. Instead of openly spending money, Congress has written $1.3 trillion a year of tax breaks into law. In the case of individuals, these breaks are available to those who itemize, but not to those (usually with lower income) who don’t.

Camp and Baucus said they planned to produce a tax overhaul that would put “regular families on a level playing field with those who can pay high-price tax advisers.” That’s good.

They said they’d agreed that a tax overhaul would “result in a system that is as progressive as the current one” and “close special interest loopholes to help lower rates.” That’s good, too.

What they did not say is whether they intend to raise more revenue than the current code does — an estimated 16.7 percent of gross domestic product this year against outlays of 22.7 percent.

They should, but it will be the subject of a huge fight, one of many the project entails.

Where they seem to be heading is a model like the historic 1986 tax overhaul that lowered the top individual rate from 50 percent to (effectively) 33 percent and the corporate rate from 48 percent to 34 percent, closing dozens of loopholes to accomplish the feat.

As Wall Street Journal reporters Jeffrey Birnbaum and Alan Murray recount in the one of the best legislative histories ever written, “Showdown at Gucci Gulch,” a tax overhaul was deemed impossible to achieve when Sen. Bill Bradley, D-N.J., first proposed it in 1982, and it nearly died multiple times before it finally passed, 292-136 in the House and 74-23 in the Senate.

Arrayed against the measure was practically every powerful interest group in Washington, represented by the highest priced lobbyists in town.

Yet the project succeeded because President Ronald Reagan was behind it and the leaders of Congress, dubious though some of them were, thought they could not fail to produce something.

Now, it’s going to be even more difficult than it was then, as scholars John W. Diamond and George Zodrow wrote in a 2011 study for the Baker Public Policy Center at Rice University.

“The political climate seems more polarized than in the earlier era, so that a higher level of leadership, statesmanship and bipartisanship will be required to achieve reform,” they wrote.

Moreover, in 1986 the tax burden on individuals was cut by 8 percent at the expense of corporations, which were given a lower rate but paid roughly $150 billion more in taxes.

Now, it’s widely agreed, the U.S. corporate tax rate is too high — 35 percent, second highest in the world — which suggests that businesses can’t pay the bill for individuals.

Finally, it’s going to be hard for President Barack Obama to play the leadership role that Reagan did in the 1980s, in as much as Obama is seen by Republicans as having a redistributionist, soak-the-rich tax policy.

So Baucus or Camp is going to have to play the role of Bob Packwood, the Senate Finance chairman, who — at a moment when it seemed that special interests had strangled a tax overhaul — came up with a radical, loophole-closing measure that passed the Senate 97-3.

A radical proposal this year might be the X tax, championed by Alan Viard of the American Enterprise Institute. It’s a progressive consumption tax that businesses would pay on their cash flow and individuals would pay on the difference between their income and their savings.

A tax policy rewrite clearly is one of the most difficult tasks Congress could take up; it’s complicated, contentious and ridden with special-interest influence. But if Camp and Baucus can pull it off, it will go a long way in redeeming the image of Congress.

  • Jeff

    Here’s a tax-reform sure to provide a major economic boost: forbid the government from conscripting private citizens and businesses to serve as its tax collectors. You want you income and sales tax receipts? Bill the person who owes them yourself and do you own collecting.

  • David S Lesperance

    I fully agree that the current tax system (laws, regimes, regs) is broken. I might also concede that alternatives like the “Fair Tax”, might be more fair. However, I think that any discussion about any type of substantive tax reform actually being implemented is moot, given the current political situation.

    My Golden Geese clients (the top 1%) don’t like the present situation. As Hirschman says, their response will be either Exit, Voice, or Loyalty. Increasingly, my clients are saying that throwing money at lobbyists or politicians with the hope of correcting the situation is useless. Likewise, there is decreased satisfaction with the efficient and effective use of tax monies by the US government in solving societal ills or providing services. This results in reduced loyalty to the existing system of unlimited liability for taxes paid to the US government. This decreased loyalty is exasperated by globalization providing many favourable alternative jurisdictions where a Golden Goose can limit their tax liability while maintaining their personal and business lifestyle.

    The obvious result is a gigantic increase in EXIT. You already see evidence of this with record numbers of US expatriations. Look for this number to skyrocket in coming years. The problem for the US government is that the top 1% account for just over a 1/3rd of the total personal taxes collected. Therefore you only need a tiny number of Golden Geese leaving to have a HUGE negative effective on tax revenue.

    • Tony Leach

      We must move taxation to ‘consumption’ and away from ‘production’ and put Americans in charge of how much they pay in taxes. Stop punishing the economy for producing and instead tax what we’re the best at…consuming.
      It’s really a no brainer for average folks, but for government it’s a huge danger removing power they’ve acquired over the last 100 years.
      Government cannot come up with a plan but too many people are ignorant and think they’re the only people who can.

      • David S Lesperance

        I agree that the US government “should” move to consumption taxation. However, in the real world they WILL NOT do so, until long after the damage is done by the unsustainability of the current tax model. Between now and then, it is logical that most Golden Geese will exit the US tax regime before they get really bruised.

  • Tony Leach

    Any tax reform that comes from government is like the burglar designing your home security system. I’m amazed at how ignorant people are thinking government can or will solve a problem they caused.
    Any tax reform should come from Americans and not government.
    HR25 The FairTax Act lists what both parties want yet neither party will touch it, hence it needing serious research by the American people.
    Designed by the private sector, endorsed by many economists, designed from $20 million in privately funded research and levels the playing field for everyone. Most importantly is gets government out of our income!!
    Dave Camp has ignored this bill which sits in his very committee for a reason.
    President Obama listed what he wanted in tax reform as well as the Democrat party leaders in 2005…HR25 is what they’ve both asked for.
    Republians have listed what they want from tax reform (Dave Camp included) and this bill takes care of it. However they ignore it because it takes power away from them….the most important issue when it comes to taxes…putting us in control!!

    • David S Lesperance

      Dear Tony: I hear your anger and frustration, but as you so rightly point out, if or until the current tax collection revenue system collapses, the likelihood of the Fair Tax proposals becoming law is slim.

      In the meantime, the current system which continues to over-rely on the Golden Geese to sustain it, will become weaker and weaker as US Golden Geese choose to overcome their current life inertia and move to jurisdictions in which they can greatly reduce and control their tax burden. As I point out in my original post, you only need a tiny number of Golden Geese to depart to blow a huge hole in government revenues.

  • John Neitz

    The Fair Tax Plan.

    I endorse it whole heartedly.

    The object is to replace the inequity and absurdity of (Karl Marx’s) graduated income tax with a fair and logical national excise tax that is more in line with our original Constitutional Principles.

    Income taxes and free market economies cannot really coexist. The moment you allow the taxing of incomes is the moment you transition from free market to debt slavery. The income tax is a huge obstacle to productivity and prosperity. It only serves to divide Americans into warring camps.

    If you get your head into it you will be amazed to find that the Fair Tax Plan is the most logical path for replacing the brutality and inequity of an income tax system taken directly from the pages of the “Communist Manifesto.”

    Please take the time to study this article.

  • Gracemarie Collins

    The broken tax code does not need an overhaul. It needs to be scraped and replaced with the FairTax HR25 S122. Overhauling and tweaking of the existing tax code has not solved anything to date. Our politicians want to continue tweaking because the broken tax code keeps them in control. It is time We the People let them know that enough is enough enact the FairTax HR 25 Understand it and you will demad it!
    PS We all have to stop saying we can’t do anything about it. We have voices, and the power of the vote!

  • Ilovedny Letsfixit … will fix it! The FairTax Freedom Act will set US American Taxpayers free from income tax slavery. Get HR25/S122 out of committee and pass true income tax reform.

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