An Economic Analysis Of The Camp Tax Reform Discussion Draft
- The GDP effect of the domestic provisions of Camp’s income tax reform would be to raise the level of GDP very slightly over the long term by about 0.2 percent compared to current law, consistent with the lower end of the Joint Tax Committee’s estimates for the proposal.
- The improvement in GDP is dependent on a partial inflation adjustment of the depreciation schedules for equipment in the Camp draft. Without the partial inflation adjustment, we find that the Camp plan would reduce GDP relative to current law by about 0.4 percent.
- The income tax reform plan would reduce labor productivity and total pre-tax income. However, the after-tax wage would rise due to personal tax rate reductions, encouraging more labor force participation. Reduced labor costs and higher after-tax wages should increase hours worked, equivalent to adding about 486,000 full-time jobs. People would be working longer but producing less total output with less capital.
- If the reform plan had retained the current depreciation regime (MACRS), it would generate 6 times the growth and 40 percent more jobs and produce a small revenue gain after economic growth. If it had retained MACRS and allowed a 50 percent exclusion of capital gains and dividends, instead of the 40 percent exclusion in the plan, it would generate 12 times the growth and nearly twice the additional jobs and would result in a significant revenue gain in the long term.
- A more fundamental reform—such as replacing the income taxes with a personal expenditure tax or other “saving-consumption neutral” tax system—could raise GDP by 12 percent to 15 percent and could either return larger revenue to the government for deficit reduction or remain revenue neutral on a dynamic basis to maximize the growth effect.
Chairman Dave Camp (R-MI) of the House Ways and Means Committee released his tax reform plan earlier this year. We used our Taxes and Growth model to estimate the long-run economic and federal revenue effects of the draft income tax reform plan. Our modeling effort was concentrated on the domestic provisions of the proposal.
The reform was intended to be revenue neutral on a static basis (assuming no change in GDP). It was also intended to create a less distortive tax system that might collect revenue in a more growth-friendly manner while remaining distributionally neutral.
Overall, we find that the domestic provisions of Camp’s tax reform proposal would increase GDP by 0.22 percent over the long run, which is on the low end of estimates by the Joint Committee on Taxation. Additionally, the plan would raise taxes on capital and modestly decrease the capital stock by 0.18 percent. It would reduce taxes at the margin on labor income, adding an additional 486,000 jobs, but slightly decrease pre-tax wages by 0.21 percent, largely due to the decrease in the size of the capital stock.
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