Due to decades of lobbying and a diversity of influence group pressures, the United States federal tax code has become a minefield of deductions and loopholes. Leaders on both sides of the aisle have publicly called for reform. One important thing stands in the way of comprehensive reform: the enormous power of groups who wants to keep their tax breaks and cut someone else’s. Nonetheless, the multitudes of problems with the tax code cannot go unchanged forever. Reform will come eventually; passing reform will only require determined legislators and time.
House Ways and Means Committee Chairman David Camp (R-Mich) recently released a long awaited framework for comprehensive tax reform. As the most comprehensive tax reform proposal in decades, the reform measure is unlikely to pass. Instead of writing off this initial effort, however, we should recognize that Camp’s proposal lays the groundwork for future reform. Other legislators, such as Rep. Paul Ryan (R-Wisc), will one day pick up where Camp left off and pass reform under more favorable conditions.
Camp’s plan aims to simplify the tax code by eliminating the Alternative Minimum Tax, a tax meant to target high-income earners that now mostly affects the middle class, and scarping the current bracket system in favor of two brackets of 10 and 25 percent. According to a press release issued by Camp’s office, 99 percent of all taxpayers would pay 25 percent or less on income tax. In some cases, the plan would eliminate the need for taxpayers itemize when calculating their taxes. The proposal also includes a wide array of other changes, such as increasing the size of the research and development tax credit and making it permanent, increasing the size of the deduction given to taxpayers with children, and eliminates exemptions for foreign individuals making money abroad while within the country.
The plan will likely face particularly stiff political opposition from the many groups who benefit from the current system. The loopholes targeted in Camp’s proposal did not simply materialize. In most cases, powerful lobbyists and interest groups leaned on representatives to add them. These same groups are likely to devote considerable resources to ensuring this reform bill does not pass. For example, groups such as Intuit, the makers of Turbotax, benefit from the sheer complexity of the entire system and oppose all reform. Because they also donate heavily to campaigns, this opposition poses a legitimate threat to reform.
Specifics of the plan and congressional gridlock both also suggest this particular bill is unlikely to ever go into effect. The reduction in rates in Camp’s plan would require $5 trillion of new revenue to remain deficit neutral. Even though this can be done, it would be exceedingly difficult and politically treacherous. Many of the most difficult questions, such as a potential tax on large Wall Street banks, were left completely unanswered.
But this does not mean tax reform has seen its last days. Looking at how reform succeeded in the past sheds light on the way forward. President Reagan called attention to the issue in his 1984 State of the Union Address and eventually successes in passing a significant reform. The push for reform, however, began long before that in the 1960s when President Kennedy started corralling support on the issue and Treasury Secretary Joseph Barr revealed that tax breaks amounted to one third of total tax revenue. Even though Reagan got the credit for the reform, many people played critical roles before he ever took office.
While Camp’s proposal is far less revelatory than Barr’s, it continues a conversation likely to come to fruition in the near future. Paul Ryan is currently waiting in the wings to take over Camp’s chairmanship at some point in the not so distant future. With the support of Republican leadership and perpetually precarious Tea Party backing, Ryan may just have the right mix of traits to move a conservative tax bill. Between his now notorious budget and his support of immigration reform over the summer, Ryan has shown a willingness to support legislation that does not have absolute party support or will attract the ire of the media.