Four Things to Look for in Chairman Camp’s Tax Reform Plan

February 25, 2014

Tomorrow, Chairman Dave Camp of the House Ways and Committee is expected to release his long-awaited tax reform plan. As always we will evaluate it based on the principles of sound tax policy, which have guided the Tax Foundation since 1937 and generations of economists since then, and before, going back to Adam Smith. Particularly, the following four questions arise regarding Chairman Camp’s plan (or any tax reform proposal):

1. Does it make the tax code simpler?

The complexity of the tax code is apparent to virtually everyone. It’s 70,000 pages long, 4 million words, sits a foot tall when printed, takes over 6 billion hours for Americans to comply with, etc. Tax reform should reduce significantly these measures of complexity.

2. Does it make the tax code more transparent?

Another problem with our tax code and the tax writing process is the lack of transparency. First of all, many taxes are hidden from the ultimate taxpayers, e.g. corporate taxes are ultimately paid by workers to a large degree. How many taxpayers and how many voters know that? Or ask yourself this: how does Congress decide how much tax revenue a particular bill or proposal might raise? Now imagine how uninformed the average voter is on this. Do voters or members of Congress understand the differences between static and dynamic scoring? Early signs indicate that Chairman Camp’s efforts are leading to a healthy and public debate on these issues.

3. Does it make the tax code more neutral?

The most critical failing of the tax code is the many cases of non-neutral treatment, resulting from years of piling on rewards or punishments for this or that special interest. The most egregious example, and the one most detrimental to long-term economic growth, is the non-neutral treatment of consumption today versus consumption tomorrow. A pure income tax double taxes saving and investment, through corporate taxation, shareholder taxation, and estate taxation. This causes less saving and investment, which means more consumption today but less tomorrow. Because saving and investment are the key to long term economic growth, America is limiting its future with such a relatively heavy reliance on income taxation. Tax reform properly understood addresses at least one of the layers of double taxation of saving and investment, either through reduction of corporate taxes, reduction of shareholder taxes (for example, by crediting shareholders for corporate taxes paid), or reduction of estate taxes. This is what most countries outside the U.S. have been doing for the last 20 years, leaving the U.S. far behind.

4. Does it avoid retroactivity?

As with any law, tax laws should be stable over time and not apply retroactively. This is a basic fairness issue, but it also lets taxpayers better plan their affairs, particularly long-term economic decisions like investment and hiring. 

 

For more on the perils and promise of tax reform, including the growth effects of various changes, see our publication from earlier today.

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