Rate Cut Promise Leads to Corporate Tradeoff in Tax Code Redo

Republicans have spent the past three years promising to significantly reduce personal and corporate tax rates without increasing the budget deficit. They’re about to show how.

Representative Dave Camp, chairman of the House Ways and Means Committee, will release a draft bill this week that’s being closely watched by corporate lobbyists and lawmakers. The plan will point up the tradeoffs in reshaping the tax code and altering U.S. tax breaks for retirement, housing, energy, charity, health care, capital gains and finance.

“It gives people a chance to see in stark relief what it takes to get a broader-based, lower-rate code,” said Jonathan Traub, a former senior aide to Camp. “It’s incredibly difficult. There are few provisions in the code that are sort of broadly agreed by everybody to be loopholes. A rate reduction benefits everybody, but it’s very expensive.”

The plan has little chance of becoming law this year. Even so, the response from lawmakers, business groups and the public will test an idea that has been at the center of Republican economic policy.

“It’s going to force people, policy makers, to either say the Camp bill is fundamentally sound or potentially to back off this kind of framework,” said David Kamin, a law professor at New York University and former tax policy aide to President Barack Obama. “This is going to be seen as a manifestation of the general idea that conservatives have been talking about.”

Since 1986

The draft is a product of the political and arithmetic constraints Camp imposed in producing the most complete reconstruction of the U.S. tax code since 1986. He will have to supply all of the details, moving beyond the outlines in House-passed budgets and campaign platforms that typically focus on benefits and not costs.

Mathematically, Camp is aiming to reduce the top individual tax rate to 25 percent from 39.6 percent and the top corporate rate to 25 percent from 35 percent. He has pledged to do so without increasing the budget deficit and without making the tax code less progressive.

The Camp plan would collapse the seven tax brackets into two -- at 10 and 25 percent, the Washington Post reported yesterday. Some income above $450,000 a year would be subject to a 10 percent surtax, the newspaper reported, citing an unpublished congressional report it reviewed.

The plan may lower effective tax rates on capital gains and dividends by taxing them at the same rates as ordinary income while excluding 40 percent from taxation, the Wall Street Journal reported yesterday. The effective rates would depend whether Camp chooses to retain a 3.8 percent tax on investment income that was part of the 2010 health care law.

Labor Force

An unpublished congressional report reviewed by the Journal found that the plan could increase gross domestic product by as much as 1.6 percent over the next decade while raising labor force participation and private sector employment.

Achieving the goals on revenue and distribution of the tax burden -- even partially -- could require curtailing long-standing tax breaks, such as the exclusion for employer-provided health insurance, accelerated write-offs for capital investment and the mortgage interest deduction.

“For many people it doesn’t feel real until you’ve seen an actual proposal,” Kamin said. “That’s going to illuminate for folks just how hard it can be.”

Camp and the other 22 Republicans on the Ways and Means panel spent several months in closed-door meetings hashing out the details, few of which have become public in advance of the full plan’s release. Camp has ruled out a capital gains tax increase, said he won’t touch the estate tax and promised to be “careful” with the mortgage break.

Lobbying Frenzy

The prospect of the release has led to a lobbying frenzy with speculation circulating about what Camp might include, such as a change to the taxation of research expenses or a top corporate rate that exceeds the 25 percent goal.

Camp’s plan won’t advance quickly. He hasn’t scheduled a committee hearing or vote, and Republican leaders haven’t said if they will allow the full House to consider the bill.

The release of the plan is itself a political risk, because it will require Republicans to defend or reject Camp’s choices and because it may irritate industries and constituencies that would see their taxes increase.

Even if Republicans could agree, Camp’s plan is a long shot in a politically divided government. The leading Democratic policy makers have other priorities and the party is reluctant to reduce the 39.6 percent top rate for individuals that it fought for years to restore.

Renewing Breaks

Ron Wyden, an Oregon Democrat who became chairman of the Senate Finance Committee this month, said he’s focused on renewing tax breaks that lapsed at the end of 2013 as a “bridge” to a broader bill.

That’s a contrast from his predecessor, Montana’s Max Baucus, who toured the country with Camp promoting a coordinated -- though not identical -- plan. Baucus is now the U.S. ambassador to China.

Treasury Secretary Jacob J. Lew and other administration officials say Congress should focus only on business taxes, as higher revenue from individuals will eventually be needed in a fiscal agreement to resolve “generational” challenges.

“There is a convergence of thinking on business tax reform, where it is possible that you could get an agreement, if not in the next few months, certainly in the next 18 months, two years,” Lew said Feb. 21 at a conference in Sydney. “I think it would be a mistake to keep business tax reform and individual tax reform totally locked together.”

Relinquishing Gavel

Camp’s plan, even if it doesn’t go anywhere this year, will be a blueprint for future tax revisions. The 60-year-old from Michigan faces Republican term limits at the end of 2014 that will force him to relinquish the committee gavel, giving him an incentive to air his ideas now.

“He’s not going to just say, it’s unlikely, so I’m not going to do it,” said Traub, who was Ways and Means Committee staff director under Camp and is now managing principal for tax policy at Deloitte Tax LLP in Washington. “From the get-go, his number one issue that he wanted to work on was tax reform. It started at number one and never wavered from that.”

Camp’s expected successor is Representative Paul Ryan of Wisconsin, who could use the plan as a template, giving him a chance to gauge reaction and make changes. Ryan is currently chairman of the House Budget Committee and was the 2012 Republican vice presidential candidate.

Companies and trade groups, too, are watching the details of the draft closely.

“All the hearings and all the working groups and all the discussion drafts that have been out there lay the foundation of what’s to come,” said Carolyn Lee, senior director for tax policy at the National Association of Manufacturers.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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