It’s that time of year when taxes are on everyone’s mind – but in Washington we’re not just talking about filing. Reforming the tax code in one way or another has been a stated priority for both parties in Congress for many years. While there has been plenty of talk about the need for reform since the last major overhaul in 1986, little has been put forth to fundamentally address the increasingly confusing American tax system. But that changed in the last week of February, when House Ways and Means Chairman Dave Camp, a Michigan Republican, unveiled a groundbreaking plan to significantly change our tax structure.
Camp’s legislation comes after nearly two years of bipartisan outreach and assessment by the House Ways and Means Committee and the Senate Finance Committee to understand what works and what doesn’t in our tax code. While the Senate tax writers have not yet unveiled a tax plan in the Upper Chamber, Camp’s bold legislation incorporates both Republican and Democratic ideas.
The biggest surprise about the Camp plan may have nothing to do with its revisions to the tax system, but rather that in an election year the Chairman displayed enough political courage to put his colleagues to task on an issue that has been fodder for campaign speeches but gotten little actual attention for two decades.
At 979 pages of legislative text, Camp’s plan addresses nearly every facet of our tax system. The effort is focused on streamlining taxes for American citizens and businesses alike. The current seven tax brackets are streamlined to three: a 10% bracket incorporating the current 10% and 15% brackets; a 25% bracket incorporating the current 25%, 28%, 33% and 35% brackets; and a 35% bracket incorporating the current 39.6% bracket. The Camp plan also provides a significantly more generous standard deduction of $11,000 for individuals and $22,000 for married couples, slashing the number of taxpayers being forced to itemize deductions. Additionally, the plan consolidates the many confusing education tax breaks, encourages retirement savings, maintains the American dream of homeownership, and establishes a framework to promote easier charitable giving. These are just a few of the highlights.
The changes to business taxation are no less substantial. Among the many significant changes, the statutory tax rate for businesses large and small is lowered across the board, ending America’s dubious distinction of having the highest corporate rate in the developed world. Business taxes will not exceed a top rate of 25%, whether it be small business owners reporting business income on their personal taxes or companies filing corporate taxes. The use of “cash accounting” is expanded to all businesses with gross receipts of up $10 million, significantly lowering the accounting burden. Deductions for start-up and organizational expenses are consolidated and simplified. The Alternative Minimum Tax (AMT) is repealed and the R&D tax credit is improved, expanded and made permanent. In short, the Camp plan remakes the corporate tax system to promote innovation, job growth and investment in America. For many years the tax code has been an obstacle to American competitiveness vis-à-vis Europe, Asia, and South America. This legislation strikes a major blow to that hurdle.