Tax-Writer Camp’s Push for Rate Cut Forces Deduction Choice

U.S. Representative Dave Camp
U.S. representative Dave Camp. Source: Office of Dave Camp via Bloomberg

Representative Dave Camp’s call to lower U.S. corporate and individual tax rates to 25 percent would require Congress to make the type of difficult choices that have doomed tax overhaul plans for a quarter century.

Camp, a Michigan Republican who heads the House Ways and Means Committee, this week said he wants to lower the top individual and corporate rates by 10 percentage points. His aim would be to collect revenue totaling 18 percent to 19 percent of gross domestic product, which is near the recent average.

A rate cut of this scope would require curbing expensive deductions, said Clint Stretch, managing principal of tax policy for Deloitte Tax LLP in Washington. Chief among them would be tax breaks for employer-provided health coverage and deductions for mortgage interest and state and local taxes, he said.

“At 25 percent, virtually all of the sacred cows have to go,” he said. “That will be the difficult thing.”

Such deductions and exclusions are popular and costly. The congressional Joint Committee on Taxation has said the health-care exclusion will cost $659.4 billion between 2010 and 2014. The mortgage interest deduction totals $484.1 billion. State and local property tax deductions cost $120.9 billion, and other state and local tax deductions are another $237.3 billion.

Investment Tax Breaks

Investments taxed at reduced rates, including capital gains and dividends, would need to be reexamined to meet Camp’s target, said Douglas Holtz-Eakin, president of the American Action Forum in Washington, a non-profit group that favors smaller government.

“That is the biggest conceptual disagreement among folks,” Holtz-Eakin said, referring to capital gains and dividends, which are taxed at 15 percent for most individuals.

When Camp announced his 25 percent rate target March 16, he didn’t provide details on how the forgone revenue to the Treasury would be made up.

He said the rate target is a starting point that he hopes will focus the debate on a potential tax code overhaul.

“It’s important to have a goal out there and try to get to the goal,” he told reporters yesterday.

Democratic Reaction

Democrats were noncommittal on whether Camp’s goals could be achieved. Representative Charles Rangel, a New York Democrat who is a senior member of the Ways and Means panel, said debate over eliminating deductions could be a political minefield.

“Any closing of the loopholes can be politicized by calling it an increase in taxes,” he said.

Representative Sander Levin of Michigan, the top Democrat on the Ways and Means panel, also was skeptical.

“It’s one thing to conceive a goal of a top tax rate of 25 percent for individuals and corporations,” he said. “It’s another to see how it would work when Republicans are slashing vital programs.”

Senator Ron Wyden, an Oregon Democrat who has advanced a tax overhaul plan that has a maximum 24 percent rate for corporations and 35 percent for individuals, called Camp’s 25 percent rate goal a “heavy lift.”

“You’ve got to come up with a lot of revenue,” he said, adding that he was open to hearing more of Camp’s ideas and working with him.

Obama Position

A Treasury spokesman didn’t comment yesterday on Camp’s proposed rate cut. In his State of the Union address Jan. 25, President Barack Obama said he wants to lower the corporate tax rate and broaden the base, and is open to discussions about the individual tax code. He has said any cut in the corporate rate must be accompanied by reducing or eliminating tax breaks.

Obama’s fiscal commission last year determined that individual tax rates could fall to as low as 23 percent if all deductions, including for home mortgage interest, were removed. The panel said rates shouldn’t be higher than 29 percent.

Holtz-Eakin said a significant aspect of Camp’s announcement was his commitment to rewriting both the individual and corporate tax codes. Many business owners report corporate income on their individual returns, so a corporate tax-rate drop wouldn’t help them.

“This is one way to recognize that,” Holtz-Eakin said. “We want to get the corporate rates down and we want to get individuals rates down so we don’t have a mismatch.”

Senate Finance Committee Chairman Max Baucus, a Montana Democrat, said yesterday he supported a corporate rate cut without specifying a target. He wouldn’t directly answer questions about the individual rate, saying he was focusing on the corporate code. He has said in the past that he is pursuing changes to both the individual and corporate tax systems.

Camp’s idea will ultimately end up as little more than a starting point, Deloitte’s Stretch predicted.

“This is positioning,” he said. “This is an effort to frame the choice the country has.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE