Policy

Full Steam Ahead on Tax Overhaul, Thanks to Camp-Baucus Duo

The best news coming out of Congress recently — other than bipartisan work on immigration — is bipartisan work on a tax policy overhaul.

And it’s being conducted not by an ad-hoc “gang” — useful as those are when responsible leaders won’t act responsibly — but by the two people most in charge of the subject: House Ways and Means Chairman Dave Camp, R-Mich., and Senate Finance Chairman Max Baucus, D-Mont.

The two wrote a joint op-ed in The Wall Street Journal on April 8 committing themselves to producing overhaul legislation, which Camp’s office says he hopes will be out of his committee by the end of the year.

They appealed for public input by Tax Day, and Camp’s office said it received 1,300 submissions, the fruits of which are supposed to be analyzed by the Joint Committee on Taxation next month.

Now that Baucus has announced his retirement from Congress, presumably he has motivation to establish as part of his distinctly mixed legacy a wholesale repair of what he and Camp called a “broken” tax code.

As every taxpayer knows, the system is wretchedly complex. The legislators said it requires six billion hours of document work each year and more than $170 billion in expense for accountants and lawyers, or 15 percent of total tax receipts.

Moreover, as most taxpayers suspect, the system is wildly unfair, with some corporations and individuals escaping payment of any tax at all, with more than $400 billion a year less taxes being paid than are owed and with some industries paying a far lower tax rate than others. Mining, for example, averages 18 percent, while wholesale and retail trade pay 31 percent.

The tax system distorts economic decision-making. Instead of openly spending money, Congress has written $1.3 trillion a year of tax breaks into law. In the case of individuals, these breaks are available to those who itemize, but not to those (usually with lower income) who don’t.

Camp and Baucus said they planned to produce a tax overhaul that would put “regular families on a level playing field with those who can pay high-price tax advisers.” That’s good.

They said they’d agreed that a tax overhaul would “result in a system that is as progressive as the current one” and “close special interest loopholes to help lower rates.” That’s good, too.

What they did not say is whether they intend to raise more revenue than the current code does — an estimated 16.7 percent of gross domestic product this year against outlays of 22.7 percent.

They should, but it will be the subject of a huge fight, one of many the project entails.

Where they seem to be heading is a model like the historic 1986 tax overhaul that lowered the top individual rate from 50 percent to (effectively) 33 percent and the corporate rate from 48 percent to 34 percent, closing dozens of loopholes to accomplish the feat.

As Wall Street Journal reporters Jeffrey Birnbaum and Alan Murray recount in the one of the best legislative histories ever written, “Showdown at Gucci Gulch,” a tax overhaul was deemed impossible to achieve when Sen. Bill Bradley, D-N.J., first proposed it in 1982, and it nearly died multiple times before it finally passed, 292-136 in the House and 74-23 in the Senate.

Arrayed against the measure was practically every powerful interest group in Washington, represented by the highest priced lobbyists in town.

Yet the project succeeded because President Ronald Reagan was behind it and the leaders of Congress, dubious though some of them were, thought they could not fail to produce something.

Now, it’s going to be even more difficult than it was then, as scholars John W. Diamond and George Zodrow wrote in a 2011 study for the Baker Public Policy Center at Rice University.

“The political climate seems more polarized than in the earlier era, so that a higher level of leadership, statesmanship and bipartisanship will be required to achieve reform,” they wrote.

Moreover, in 1986 the tax burden on individuals was cut by 8 percent at the expense of corporations, which were given a lower rate but paid roughly $150 billion more in taxes.

Now, it’s widely agreed, the U.S. corporate tax rate is too high — 35 percent, second highest in the world — which suggests that businesses can’t pay the bill for individuals.

Finally, it’s going to be hard for President Barack Obama to play the leadership role that Reagan did in the 1980s, in as much as Obama is seen by Republicans as having a redistributionist, soak-the-rich tax policy.

So Baucus or Camp is going to have to play the role of Bob Packwood, the Senate Finance chairman, who — at a moment when it seemed that special interests had strangled a tax overhaul — came up with a radical, loophole-closing measure that passed the Senate 97-3.

A radical proposal this year might be the X tax, championed by Alan Viard of the American Enterprise Institute. It’s a progressive consumption tax that businesses would pay on their cash flow and individuals would pay on the difference between their income and their savings.

A tax policy rewrite clearly is one of the most difficult tasks Congress could take up; it’s complicated, contentious and ridden with special-interest influence. But if Camp and Baucus can pull it off, it will go a long way in redeeming the image of Congress.