Representative Dave Camp, the Republican chairman of the House Ways and Means Committee, released his tax-reform plan yesterday. Here are the four best elements of the plan, the three worst -- and its biggest missed opportunity.
Let's start with the good stuff:
--The plan cuts taxes on business investment. Those taxes are now higher than in any other developed country, which encourages companies to invest abroad rather than in the U.S. The Camp plan changes those incentives, which ought to mean more capital domestically -- and, in the long run, higher wages. It would be even stronger on this front if it didn't drag out how long it takes for businesses to write off investments.
--It ends the tax deduction for state and local taxes. That deduction is a subsidy from people in low-tax states to those in high-tax ones. It also puts a federal thumb on the scales in the debate over how big state and local governments should be. Camp is right to seek its end.
--It scales back the tax break for mortgage interest. Democrats are already salivating at the chance to portray Republicans as the enemies of homeowners. But the plan is pretty sensible. It limits the break to $500,000 in mortgage debt and applies it only to future mortgages. There's no reason to expect a large negative effect on home prices, and a little less subsidization of debt seems like a good idea.
--It reforms and consolidates the tax breaks the government uses to encourage various social goals. Fifteen tax provisions related to education would be folded into five, for example. Much of the earned-income tax credit would become an exemption from payroll taxes, which would make getting the credit simpler for beneficiaries while also reducing the staggering rate of improper payments in the current program.
Now for the other side of the ledger:
--It automatically raises tax rates. Economic growth moves people into higher tax brackets. Average tax rates therefore rise over time, even if Congress doesn't vote for the increase. The federal government thus gets a disproportionate share of any economic growth. By changing the way tax brackets are adjusted for inflation, Camp's plan speeds up this process.
--It imposes a new tax on a few banks with a large number of assets. This tax is not completely unjustified: It's billed as a way of offsetting the advantage these firms get from being considered candidates for bailouts in the event they run into trouble. But is this the right way to fix that problem? Shouldn't we base the tax on liabilities rather than assets, if we're trying to tackle the too-big-to-fail problem?
--It raises taxes on carried interest. I've changed my mind on this issue over time. At first glance, taxing investment managers at capital-gains rates instead of at the higher rates for ordinary income seemed like an unfair break and a reward for gamesmanship. I've been convinced that it's actually the right way to tax “sweat equity.”
There's more good than bad in the plan, by my lights. Yet it still doesn't seem like the right direction for Congress, or for Republicans. Camp missed an opportunity to rectify one serious public-policy problem in a way that would appeal to a lot of middle-class voters.
Federal policy has a bias against children, and especially against large families. By expanding the child tax credit to $1,500 per child from $1,000, Camp's plan would reduce that bias, but only very modestly. A bigger expansion would've required Camp to modify other elements of his plan so that it would continue to raise as much revenue as the current code: He might have had to refrain from abolishing the alternative minimum tax, for example. It would have been a better policy, and it would have been easier to make the case for it to middle-class voters.
Senator Mike Lee, a Utah Republican, has advanced a tax reform that puts an expanded child credit at its center. Because it applies the credit against payroll taxes, it does more than Camp's plan to relieve families from their burden. Lee's plan also includes some of the good ideas in Camp's: It, too, abolishes the state and local tax deduction and scales back the mortgage-interest deduction. But Camp's plan has some worthy provisions, such as the improved tax treatment of business investment, that Lee's does not.
Camp's proposal is intended as a "discussion draft." Nobody expects Congress to move on it this year. So there's plenty of time to meld the best parts of both plans together: marrying the pro-family, middle-class core of the Lee plan with the pro-business features of Camp's.
Perhaps Paul Ryan, who will succeed Camp as Ways and Means chairman if Republicans hold the House this fall, can take up that project. It has been a long time since Republicans had an attractive platform on taxes, and about as long since we've had bipartisan tax reform. Ryan has a chance to advance both goals.
(Ramesh Ponnuru is a Bloomberg View columnist, a visiting fellow at the American Enterprise Institute and a senior editor at the National Review.)
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