Tax Reform: Reading the Tea Leaves Part V

One of the few issues lawmakers from both political parties support is tax reform, meaning to simplify the U.S. tax code by eliminating special preferences and cutting tax rates.

Last week Rep. Dave Camp (R-MI), chairman of the powerful House Ways & Means Committee, unveiled a comprehensive tax reform proposal years in the making.

Will it become law this year?

Of our encyclopedic Internal Revenue Code Rep. Camp quipped, “It is now 10 times the size of the Bible, but with none of the Good News.”

That the tax code has become gargantuan in size and complexity is bad enough. Nina Olsen, the IRS Taxpayer Advocate, estimates that Americans spend over six billion hours every year complying with tax filing requirements. Worse, many taxpayers no longer trust the tax code to be fair.

Democrats and Republicans agree the solution is obvious: repeal as many special deductions as possible, which will raise billions in revenue, and then return revenue to taxpayers in the form of lower rates.

The formula has worked before, most recently in 1986 when President Ronald Reagan and a bipartisan congressional coalition teamed up on sweeping tax reform legislation.

Rep. Camp’s proposal, based on testimony from hundreds of witnesses at 30 separate committee hearings, would “fix America’s broken tax code by lowering tax rates while making the code simpler and fairer for families and job creators.”

Specifically, the Tax Reform Act of 2014 would collapse present tax brackets to two—of 10 percent and 25 percent, “ensuring that 99 percent of all taxpayers face maximum rates of 25 percent or less.” Moreover, the standard deduction would be significantly increased, to $11,000 for individuals and $22,000 for couples. And the highest earners would be subject to a new 10 percent surtax on earnings over $450,000, essentially creating a 35 percent tax bracket.

On the other side of the equation the bill would repeal 220 sections of the tax code, including the deduction for state and local taxes. The mortgage interest deduction would be limited to $500,000 of debt and the exclusion for employer-provided health coverage would be capped at the 25 percent bracket.

One would think that a proposal by the chairman of the Ways & Means Committee to simplify the tax code and cut tax rates would have a good chance of becoming law. Alas, the tea leaves tell us that this proposal will remain just that, and for two big reasons:

First, while Democrats and Republicans agree that the tax code is complicated and unfair they disagree on one vital detail: Democrats want to siphon some tax reform revenue to the U.S. Treasury, i.e., not return all the new revenue to taxpayers. Republicans, on the other hand, favor “revenue neutral” tax reform—no additional revenue for the government.

Second, neither Democrats nor Republicans wish to be diverted from their 2014 political priorities. Democrats want to focus on income inequality, the minimum wage and immigration reform; Republicans to attack “Obamacare” and pursue alternative healthcare reform ideas.

Put another way, after all the legislative battles of recent years neither side believes the country is ready for a debate over issues like the tax deduction for mortgage interest or the exclusion for municipal bond income.

Still, Rep. Camp has done a great service to the nation by mapping the way forward on what one day will become an urgent national priority—making the tax code simpler and fairer while cutting tax rates. Like the early explorers Rep. Camp has chartered the course others will follow. The only question is when.