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Unlike many previous Republican proposals to cut taxes, the Michigan congressman specifies how government would pay for them. This is critical, but it's not pretty.
On Wednesday, U.S. Rep. Dave Camp (R-Mich.), chairman of the House Ways and Means Committee, unveiled an ambitious plan to overhaul America's complicated tax code. This is both a technical and a political feat. The number of changes is immense -- the table of contents listing the provisions runs for 8 pages. The number of political enemies created is probably equally immense.
The news that people will want to hear is the proposed cut in tax rates. Officially, income tax rates would fall to 10% and 25%. The alternative minimum tax would be repealed. For corporations, the tax rate would be reduced to 25% from 35% and the tax treatment of international income would be changed almost all the way to a system that exempts foreign income.
Unlike many previous Republican tax-rate-cutting proposals, Camp's actually specifies how he would finance these changes. This is vital, but it is not pretty. Here's why:
- First, the effective rates that people would face will be higher than they might look. There is essentially a third bracket, at 35%, for those with high income. The proposal would phase out a variety of benefits as income rises and impose surtaxes on high-income households. These provisions raise revenue but they also raise the effective marginal tax rate to higher -- and possibly significantly higher -- levels compared to the "official" tax rates. They also complicate tax planning and filing.
- Second, the state and local income tax deduction would be eliminated. Mortgage interest deductions would be restricted.
- Third, Camp adopts President Obama's proposal to limit the value of itemized deductions. Camp would cap them at 25%, slightly less generous than Obama's proposed cap of 28%.
- Fourth, literally, scores of targeted provisions are slated for deletion. Lobbyists will howl, but this is what tax simplification looks like.
- Fifth, there are some items that can only be described as budget gimmicks, such as an increased emphasis on Roth IRAs versus conventional saving incentives. Because Roth IRA contributions are not deductible, a switch from traditional, deductible IRAs to Roths will raise revenue within the 10-year budget window, even though it reduces long-term revenue by even more. Thus, what looks like a revenue increase is actually a long-term tax cut. A number of other provisions, like phasing in the corporate tax rate cuts and reducing depreciation allowances have the same effect. They induce long-term budget shortfalls that are not accurately represented in the 10-year figures.