There are things to like and things not to like about Republican congressman Dave Camp’s new 979-page tax plan. But here’s what I like most about it – it starts a serious conversation about tax reform that we definitively need to have, and provides a host of ideas that deserve serious discussion.
First, the points that I’m in favor of:
- A cut in the mortgage interest deduction from $1 million to $500,000. It will make a lot of upper middle class people angry (and it will hurt people who, like me, live in big expensive cities that require enormous mortgages to procure enough space for our families). But that’s ok -- it’s still the right thing to do. As Nobel laureate Robert Shiller and other housing experts have explained, incentivizing people to pour the majority of their income into giant mortgages, which discourages investment diversification and encourages debt, isn’t a great use of our country’s savings. Ideally, the mortgage deduction would be structured in such a way as to take into account the nuances of various city real estate markets. But it’s tough to argue that we should be encouraging people to take out $1 million mortgages across the board.
- An across the board cut in the corporate tax rate from 35 to 25 % -- but only if many loopholes are closed, too. It’s true that U.S. taxes are high on an international basis – and you can make an argument that if they were lower, it would encourage more investment here at home. But it’s an argument that only holds if the companies end up paying the 25 % (currently, many corporates pay under 20 % even though the official rate is 35 %, thanks to the many corporate loopholes created by industry lobbying). I very much like the idea of not subsidizing rich industries like oil and gas or finance with special tax cuts – we should also make it a lot tougher for all industries to keep money offshore in overseas bank accounts.
- Raising more money from business versus individuals. As an initial Brookings analysis of the plan pointed out, despite its pro-business aura, it would actually cut individual income taxes and raise revenue collected from business – which is appropriate at a time when the corporate share of the economic pie has never been greater or labor’s lower.
Here’s what I don’t like so much:
- The earned income tax credit gets reduced. The EITC is one of the most effective ways of putting money in people’s pockets – we should be thinking of ways to increase, not decrease, it.
- The net effect of the changes appears to be neutral for low-income households. That’s a pity in an age when so many people are working two or three $15 an hour jobs to try and make a living wage. Tax policy should help more at a time when wages are still stagnant, and don’t look likely to go up anytime soon.
- The “tougher” tax regime for private equity and hedge funds isn’t tough enough. Capital gains and dividend taxes would increase from 23.8 % to 24.8 %. Under the Camp plan, capital gains and dividends would be taxed at the ordinary rate, but with a 40 % exclusion (which takes you to 21 %, to which you add the 3.8 % Affordable Care Act surtax). While I am glad that a Republican is finally putting the idea of higher taxes on investment income up for grabs, I still have to ask – why does making money from money require a special deduction? If anything, investment income should be taxed at a higher rate than income earned by labor. This does not get us to where we need to be to bridge the gap between Warren Buffett and his secretary.