Rep. Dave Camp, R.-Mich., chairman of the House Ways and Means committee, will Wednesday release the GOP’s long-awaited plan for simplifying the income tax. The plan will likely be dead on arrival—even Senate Minority Leader Mitch McConnell, R.-Ky., says he doesn’t expect tax reform this year—and many will say that’s a terrible pity, since everyone knows we’d be better off with a simpler, more understandable income tax.
But “everyone” is wrong. The tax code doesn’t need simplifying. In fact, it’s too simple already.
Currently the IRS divides all income into seven tax brackets. For the typical family (“married, filing jointly”) income below $17,850 is exempted from income tax altogether. Income above $17,850 gets taxed at 15%; above $72,500, at 25%; above 146,400, at 28%; above $223,050, at 33%; above $398,350, at 35%; and above $450,000, at 39.6%. Each of these successive rates is “marginal.” That means, for instance, that if your family income is $500,000 you don’t pay 39.6% tax on all $500,00--just on the part ($50,000) that exceeds the $450,000 threshold. Your first $20,000, or $100,000, or $300,00 get taxed at the same rate as anyone else’s, even if your annual income exceeds $1 trillion.
Does that sound complicated to you? Me neither.
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According to the Washington Post, the Camp plan will scrap these seven brackets and reduce them to two—one at 10% and one at 25%. Only 1% of the population will reportedly exceed the 10% threshold. That likely means the top bracket will kick in at around $372,000 (compared to $450,000 today). In addition, above $450,000 some as-yet undefined types of income will be subjected to a 10% surcharge.
Two brackets is certainly simpler than seven. But to make this work the tax system will likely have to become more regressive—i.e., take more money from lower and middle incomes than the current tax system does. And indeed, the Post’s preview confirms that the poorest taxpayers—those earning less than $20,000—will see their taxes rise slightly (but only temporarily).
Camp (and the Post) insist that over the long term his scheme will increase taxes only for wealthier taxpayers. That’s extremely difficult to imagine. But we won’t be able to weigh that claim fully until Camp releases the details of his plan. We know Camp will eliminate some of the current $1.08 trillion in various tax breaks to help pay for his rate reductions, but we don’t know which ones, or how much revenue eliminating them will provide. (The Wall Street Journal reports that Camp’s plan would eliminate tax deductibility for employer-provided health care. That’s likely to be very unpopular.)
Camp’s fellow congressional Republicans are extremely nervous that potential primary challengers will accuse them of effectively favoring a tax increase by eliminating tax breaks. They question the wisdom of identifying which tax breaks they’ll be gunning for when there’s so little chance the bill will ever clear the Democratic Senate. Democrats, meanwhile, rightly wonder why they should eliminate tax breaks just so they can lower rates. Why not eliminate tax breaks and maintain current rates? Wouldn’t that do a lot more to lower the deficit?
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Theoretically, it’s possible to close so many tax loopholes that you can eliminate lots of high tax brackets and still end up with a tax system more progressive than its predecessor that raises just as much revenue. That’s what happened in the 1986 tax reform, which created two income-tax brackets (15% and 28%). But in 1986, when reformers complained that the existing system had too many tax brackets, they were a lot more persuasive, because there were 15—more than twice as many as we have today. And the argument that the top rate was too high was easier to make then, when it was 50%, than it is today, when it's only 39.6%.
Another difference is that the 1986 tax reform bill raised the capital gains tax to bring it in line with taxes on ordinary income. You’d be hard-pressed to find any Republicans who’d favor such “simplification” today. According to the Journal, Camp would tax capital gains the same as ordinary income--but he’d simultaneously create a 40% exclusion that would effectively lower capital gains rates below current rates.
A final reason the 1986 tax reform worked so well—one that Democrats usually hesitate to point out--was that the anti-tax “supply-siders” who gave up tax breaks in exchange for lower rates got double-crossed. Yes, for three years there were only two tax brackets, and they were lower than the previous ones. But in 1991 the deficit outlook was so hopeless that Congress and the White House added a third bracket (thereby breaking President George H.W. Bush’s memorable convention pledge, “Read my lips, no new taxes!”), and by 1993 President Bill Clinton had added two more, bringing the total to five. Without these “betrayals” of the 1986 pact, President Clinton couldn’t have eliminated the deficit, however briefly, at the end of his two terms.
Something else that’s changed since 1986 is that we now know income inequality has expanded pretty relentlessly since 1979. (In 1986 we didn’t know the trend’s full extent, or whether it would last.) Fifteen tax brackets may be too many, but seven isn’t really enough—not when the top 1% has managed to double its share of the nation’s collective income over the past three decades. The 0.1% and the 0.01% are increasing their income share even faster. Income classes are proliferating among the rich, and top income brackets need to proliferate along with them to ensure that everyone is paying their proper share. A simpler tax code would be lovely. But first we’ll need a simpler economy.
Correction: An earlier version of this piece incorrectly identified Camp’s proposed two tax brackets as 25% and 39.6%. In fact, they are 10% and 25%.