Corporate to Individual Rate Cuts Rely on Best Economies: Taxes
To give the U.S. tax code a fresh look, Congress may rely on an old friend: budget gimmicks that include assumptions about economic growth that will help offset the effects of lowered rates.
That’s the assessment of lobbyists and policy analysts who specialize in the Internal Revenue Code and who are waiting for the House Ways and Means Committee to release a comprehensive tax plan before the year’s end, Bloomberg BNA reported.
After months of meetings on ways to simplify the code and lower tax rates, committee Chairman Dave Camp confronts a basic challenge. Ending many tax deductions and credits won’t cover the cost of cutting the top individual and corporate tax rates to 25 percent, as he has pledged, unless the Michigan Republican is also willing to kill such popular breaks as the deductions for home mortgage insurance and health insurance premiums.
An alternative is to tinker with the timing of various tax breaks and make economic assumptions that project more revenue with lower tax rates.
“If you do include economic growth, it’s a much more doable job,” William McBride, chief economist for the Tax Foundation, a Washington-based research group, said in an interview. “I think that’s the only doable way. You have to point to the economic growth effects.”
President Barack Obama’s administration supports a top rate of 28 percent on the corporate side, down from 35 percent, a reduction that some budget analysts say is achievable if all corporate tax expenditures are eliminated.
Camp and other Republicans on his committee haven’t said how they plan to pay for lowering the top rate an additional 3 percent, or for cutting the top rate for individuals from 39.6 percent to 25 percent. Lawmakers have adhered to Camp’s instructions not to discuss the possibilities publicly ahead of his release of legislation.
Camp has hinted that economic-growth projections will underlie his measure and its projected impact.
“In tax reform we expect to have pro-growth revenue that will go to deficit reduction,” Camp said in a brief interview with reporters Sept. 26. He added, “I’m not going to talk numbers because we do not have a bill yet.”
The Tax Foundation estimated that establishing two new tax brackets of 10 percent and 25 percent and eliminating the Affordable Care Act’s health insurance and investment income taxes, as well as killing the alternative minimum tax, would boost gross domestic product by $992 billion. The Foundation’s calculations also showed that under that scenario, the budget deficit would increase by less than a similar tax plan reviewed by the congressional Joint Committee on Taxation.
The JCT estimated that cutting individual rates to 10 percent and 25 percent and repealing the AMT would add nearly $3.8 trillion to the deficit over a decade. Cutting the corporate rate to 25 percent and repealing the corporate AMT would add $1.3 trillion more, the JCT estimated.
The main difference, the Tax Foundation said, was that its analysis allowed for the effect of economic growth -- known as dynamic scoring -- while the JCT’s didn’t.
If the Ways and Means panel were to use dynamic scoring, McBride said, lawmakers could reach Camp’s rate goals by eliminating only those tax expenditures that don’t add to economic growth. Tax breaks for retirement accounts and capital gains and dividends could be left alone, he said.
Democrats and some economists frown on dynamic scoring, and the JCT doesn’t use it to officially estimate the costs of tax legislation.
Senate Finance Committee member Charles E. Schumer, a New York Democrat, in 2012 called it a “Rumpelstiltskin fairy tale.” The Ways and Means Committee’s ranking Democrat, Representative Sander Levin of Michigan termed dynamic scoring “unworkable” at a 2011 hearing on economic models for tax legislation.
The tax-rate goals Camp has set raises several concerns, said Donald Marron, director of economic policy initiatives at the Washington-based Urban Institute and former acting director of the Congressional Budget Office.
“First is what constraints they are putting on the overall package,” such as revenue levels and distributional impact, he said. “If the goal is to get the top rate down to 28 or 25 percent and be distributionally neutral, that’s really hard unless they are willing to increase rates on investment income.”
In addition to aiming for a top tax rate of 25 percent, Camp has determined that a tax package must raise neither more nor less revenue than the current code and must not distribute the tax burden any more heavily on one group than another, compared to current law.
Several types of budget maneuvers may help the committee lower tax rates, said Chuck Marr, director of federal tax policy at the Washington-based Center on Budget and Policy Priorities. If tax-deferred retirement accounts such as 401(k) accounts were treated more like Roth IRA plans, on which taxes are paid up-front, that would boost government revenue in the short term, he said, at the price of lower revenue later.
Parts of the corporate tax code have major time elements, such as accelerated depreciation, that lawmakers could change in order to boost revenue up-front to make a sharp rate cut possible, Marr said.
Such moves carry a price, industry groups say. If accelerated depreciation were replaced with a more gradual cost recovery system, businesses’s capital costs would increase and companies would cut investments by as much as $161 billion in 2015, Margo Thorning, senior vice president and chief economist at the American Council for Capital Formation, testified to the Ways and Means Committee at a 2012 hearing.
Marr said he favors setting revenue targets first, then crafting a tax overhaul that aims for those goals. By setting a lower tax rate first, he said, “You create an incentive for gimmicks.”
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