The chairman of the Republican-led House of Representatives’ tax-writing panel proposed on Wednesday the first complete overhaul of the nation’s tax code since 1986, a plan that both political parties are likely to debate throughout this election year.
Chances are the effort will go nowhere in this Congress, a point conceded even by Republican leaders. But the 979-page blueprint, which includes collapsing individual tax brackets to 10 and 25 percent for virtually all taxable income and lowering corporate tax rates, allows both parties to argue that they’re champions of a simpler, fairer tax code.
Both sides recognize that the public is eager for a more understandable and sensible tax code. The issue also presents an opportunity for both parties to talk in reasonable terms about a big issue, the kind of dialogue often missing in ongoing debates about immigration, federal debt limits and spending cuts.
“This legislation does not reflect ideas solely advanced by Democrats or ideas solely advanced by Republicans,” said Rep. Dave Camp, R-Mich., the chairman of the House Ways and Means Committee Chairman and the author of the proposal.
The plan, he said, “recognizes that everyone is a part of this effort and can benefit when we have a code that is simpler and fairer.”
The White House found the plan a “constructive, specific proposal” that should trigger dialogue about how to proceed, said spokesman Josh Earnest. He cited several reasons for optimism, notably loophole closings and using revenue for infrastructure improvements.
The top Democrat on the Ways and Means Committee offered a similar view.
“Chairman Camp’s tax reform proposal opens up a discussion that Democrats have wanted to engage in on a bipartisan basis,” said Rep. Sander Levin, D-Mich.
The Senate’s top Democratic and Republican tax writers issued a join statement that said, “We look forward to working with members in both chambers and on both sides of the aisle to move the conversation forward.” Republicans saw promise in using the plan to counter Democratic criticism that Republicans are too extreme and too partisan.
The Camp plan would narrow the seven current tax brackets into two. Individuals who earn less than $37,400 a year would pay a 10 percent tax rate on taxable income, as would joint filers with income below $74,800. Everyone else would pay a 25 percent rate.
In a bid to entice Democrats, who insist on higher taxes on the wealthy, the plan would have a 10 percent surcharge on individuals with adjustable gross incomes above $400,000 and joint filers above $450,000. It also would reduce how much mortgage interest could be deducted from taxable income for home loans of more than $500,000, and end the ability to deduct state and local taxes from a federal return.
The proposal would cut the corporate tax rate to 25 percent from 35 percent.
It would return the tax rate on capital gains, now at 20 percent, to the rate of ordinary income, which for most Americans would become 25 percent. But about 40 percent of capital gains and dividends could be excluded from taxation under the proposal.
Senate Minority Leader Mitch McConnell, R-Ky., said Tuesday that the plan had “no hope” of passing this year, while House Speaker John Boehner, R-Ohio, was equally glum.
Boehner did favor the idea of collapsing tax brackets.
“To bring down rates, you clean out a lot of the garbage that’s in there and the special interest issues that are in there. And so I think we ought to have a real conversation about this, and this is the beginning of that conversation,” he said.
Interest groups reacted quickly to the Camp plan. The Private Equity Growth Capital Council, which represents well-heeled private-equity firms, criticized the proposal, which calls for rolling back tax law that allows the managers of these firms to have their earnings taxed not as wages but at the lower rate of investment income.
“It is so disappointing that Chairman Camp chose to single out private equity, real estate and venture capital investment by exacting a 40 percent tax increase that will discourage new investment,” the council said.
The proposed revamp also would change the way high-income earners can save for retirement. It would restrict them to Roth-style retirement accounts that use after-tax income – as opposed to pretax income, as is the case for the conventional 401(k) retirement plans held by many working Americans.
This change would affect 5 percent of the workforce, Camp said, and involves those who set aside more than $8,750 a year in tax-deferred accounts such as 401(k) plans and individual retirement accounts.
There’s less to that idea than there appears, cautioned Len Burman, a nationally recognized tax expert who’s a professor at Syracuse University.
“At best it’s just a timing gimmick. It’s a shift in the timing of revenue. It looks like we collect more right now, but we’re giving up more in the future,” he said.
That’s because conventional retirement accounts are taxed upon withdrawal in retirement, when there’s a large pot of money because of compounding gains. Roth IRAs involve after-tax income, sort of paying future taxes up front. They’re used to shelter income and lower estate taxes because they can be left alone and passed on to beneficiaries such as children after the account holder dies.
“Roths are really advantageous for super wealthy people, who are the people I have the fewest concerns about when it comes to retirement savings,” said Burman.