Rethinking the Proposed Tax Overhaul

It is never fun to admit you were wrong about something, but it happens. I wrote a blog on February 28th that said I was pleased with the tax overhaul proposal put forth by David Camp, Chairman of the House Ways and Means Committee, (R-MI). I read the published overviews of the proposal and came away believing there were things that both sides would like and things they would not like, but overall, it deserved consideration even though it has not had a chance of being seriously considered. I have since learned more about the details of this proposed tax reform package and wish to recant my earlier position.

While a reduction in the corporate tax rate to 25% and a decrease in the number of personal income tax brackets are welcomed, the finer details show that this plan would cause significant tax increases to those currently in the 39% bracket. The loss of deductions and a phasing out of the benefit of the lower tax brackets would raise the effective rate to 42% on many higher-income earners. The Brookings Institute states that a slice of America would be taxed at up to 60%. The lesson from France is that this is a bad idea. It seems to me the tax base needs to be made broader, and that another reach into the higher income bracket is not the way to go.

In addition, there is a particularly unfriendly provision aimed at the approximately 4.6 million businesses in America that are pass-through tax entities. Some are very large businesses, but most are not. These are small to medium sized businesses that are the backbone of US employment and engines for growth (these businesses employ one out of every four workers). Rep. Camp’s plan would place these firms at a significant disadvantage in that it would reach into the business income of these enterprises (income after the deduction for owner’s salaries) and make 70% of that business income subject to payroll taxes. This is a huge grab for tax dollars that will come at the expense of jobs and investment.

There is also a nasty provision aimed at multi-national corporations in that there is a deemed repatriation of money earned overseas and kept overseas. Currently those earnings are subject to the taxes due in the country in which it is earned. Mr. Camp, and others, wants to reach overseas and claim a piece for Washington, and they not only want to tax income but also brick and motor investments. This is a preposterous and outrageous money grab at multi-nationals who must compete internationally. Implementation would weaken their cash position and potentially jeopardize their well-being and it may cause some firms to wonder why they are headquartered in the US.

Proponents of the plan believe their ideas will spur growth and that the higher taxes won’t matter because the pass-through entities and higher-income people will be making more money. They are wrong. I was wrong in my initial endorsement, but they are dead wrong if they think this is meaningful tax reform that will foster growth in the US.