Dave Camp Makes the Case for Taxing Red Meat

On February 26th, Rep. Dave Camp (R-MI), chairman of the House Ways and Means Committee, released a proposal for a major overhaul of the individual tax code that he claimed would significantly reduce the amount of effort that individuals would have to expend on preparing their returns. I read a bit about Camp’s ideas when they first came out, and had planned on offering some thoughts here at RM. Unfortunately, his observation that the process of filing tax returns can be quite burdensome turned out to be an astute one: I spent the following seven weeks (right up until midnight yesterday!) working hard on my taxes, and had not a moment to spare to write about the Camp Plan until now.

Okay, not really; I actually just forgot. (I also started and finished my taxes this past Sunday, thank you very much.) But I was reminded of the issue as I filled out my forms and searched under the couch cushions for my W-2’s over the weekend, and now that everything is in the mail I thought I’d take a minute to discuss some of my reactions to Camp’s bold proposal.

And boy, is it bold. The sheer political implausibility of some elements of the plan led many commentators to declare it dead on arrival, with a few even going so far as to claim that its release was only ever intended as a bit of showmanship. Despite the early buzz, the proposal seems to have faded from the headlines; the conventional wisdom is that nothing even remotely that ambitious could pass Congress in an election year.

But that fact alone is no reason to ignore Camp’s work. The Republican Party has seen a relative flowering of policy entrepreneurship in recent months, even if some of the more wonkish conservative thinkers and pundits are misguided about how broad-based the renaissance really is. And even if none of Camp’s agenda has any chance whatsoever of becoming a reality anytime soon, parts of it could very well make their way into the platforms of future Republican candidates for higher office who are eager to present voters with fresh ideas.

On the whole, I think that Rep. Camp’s proposal is a serious one. It contains a number of good ideas that ought (in a less polarized political environment) to enjoy broad appeal among members of both parties. But it is not without its weaknesses, and it certainly isn’t above gimmicky red-meat-throwing. In fact, those two tend to coincide, with the most questionable parts of the plan also those that were most clearly included to score political points and poke political enemies.

First, a few of the commendable bits. Camp advocates scaling back the mortgage interest deduction, which is one of the most expensive tax subsidies in the individual code. The Center for Budget and Policy Priorities estimates that it reduced federal revenues by about $70 billion in 2012 alone. Since it is a deduction (which reduces taxable income) and not a credit (which reduces the dollar amount of taxes owed, and which in some cases may increase the size of a refund even if nothing is owed), its benefits tend to flow to those in higher tax brackets. In fact, the CBPP figures that in recent years more than three-quarters of the benefits associated with the mortgage interest deduction went to individuals with incomes above $100,000.

Although many budget experts have recommended converting the deduction to a credit, Camp at least takes a step in the right direction by lowering the cap on the amount of mortgage interest that is eligible for the deduction. Rather than allowing filers to deduct the interest paid on the first $1,000,000 of a mortgage, Cap would limit them to writing off only that pertaining to the first $500,000. He projects that this wouls only affect “less than 5 percent of the most expensive homes on the market today.” Given that the intent of this policy is presumably to facilitate homebuying for those who might otherwise be shut out of the housing market, and not to allow those who can already easily afford a home to afford a larger one, this tweak is certainly a sensible one.

Camp also demonstrates some courage by embracing ideas previously endorsed by President Obama and other Democrats, including “eliminating special depreciation benefits related to corporate jets” and treating “carried interest” as regular income rather than as capital gains for the purposes of taxation. He also takes steps toward shedding the GOP’s image as the party of plutocrats by proposing a quarterly 0.035% tax on any assets held by financial firms in excess of $500 billion. He defends this policy on the grounds that corporations designated as “Systemically Important Financial Institutions” or “SIFI’s” by the Dodd-Frank Act of 2010 are believed to enjoy lower borrowing costs on account of the fact that other market participants think they will be the recipients of public assistance (read, bailouts) in the event of another financial meltdown. Camp argues that taxpayers ought to be compensated for what is in effect an implicit subsidy.

Although – or perhaps because – only a handful of the very largest banks would be affected by this tax, it has provoked a great deal of backlash from lobbyists representing Wall Street banks. Mother Jones’ Kevin Drum has wondered whether Camp might have intended to provoke this backlash in order to guarantee that a SIFI tax would not be included in Republican reform plans in the future, but it’s unclear whether his motives were really that cynical. The GOP certainly has an image problem when it comes to its ties to the financial industry (although the Democrats are not immune to this problem either), and Camp seems to be at least trying to do something about it. Moreover, the notion of a financial transaction tax is one that has been endorsed on the merits by economists and pundits from across the political spectrum.

Now for the questionable parts. Camp asserts that waste and fraud in the tax system is an overwhelmingly serious problem:

Not only is the way Washington takes your money unfair, it wastes the money it takes from you… This is particularly true of existing refundable tax credit programs, where the IRS is unwilling or unable to stop the waste, fraud and abuse. For example, over the last 10 years, the IRS erroneously sent out an estimated $132 billion of your tax dollars to false claimants. The Earned Income Tax Credit (EITC), the largest refundable tax credit, consistently ranks among the worst government programs in terms of waste, fraud and abuse [emphasis added] – even though it is one of the most important tools to help low-income, working Americans. Last year, 21 to 25 percent of all EITC payments were incorrect, costing American taxpayers as much as $13.6 billion.

Leaving aside the question of whether fraud is really a problem that the IRS has not been effectively tackling, singling out the EITC for special criticism seems strange. The Republican Party’s standard response to calls from Democrats for an increase in the federal minimum wage has been to argue that expanding the EITC would be a much more effective and less costly strategy for boosting the wages of poor and low-skilled workers. Granted, Camp acknowledges that it is “one of the most important tools to help low-income, working Americans,” but this is clearly a footnote to the main argument being made here.

Deficit hawks have plenty of examples of silly or frivolous federal spending from which to choose, and are generally untroubled by creating the impression that spending of that sort represents a much, much larger share of federal outlays than it actually does. So why go after the EITC? Considering that he has three or four more examples of allegedly wasteful programs in the next several paragraphs, why not just omit it?

We should give credit to Mr. Camp for being less demagogic than many of his colleagues and for illustrating his point with more serious examples than “beaver management.” We should also acknowledge that he never actually calls for abolishing or even meaningfully scaling back the EITC. But in his zeal to attack a perennial conservative punching bag, he ends up undermining the plausibility of his own party’s alternative to a hugely popular minimum wage increase. Especially if other Republicans run with this meme in the future, the self-inflicted wound could split open even wider. (For the record, I support an expansion of the EITC in conjunction with a minimum wage hike, and I think Camp’s criticisms are more clumsy than damning.)

Another element of the plan that attracted a great deal of attention in the press when it first came out was Camp’s proposal to repeal the deduction for state and local taxes, including income, property, and sales taxes. His contention is that “[t]his deduction redistribute[s] wealth to big-government, high-tax states from small-government, low-tax states.” Commentators rightly read this as a jab at blue-state governors and legislatures, and Camp correctly notes that this benefit is most valuable to those who live in states with high taxes, which by-and-large are those that lean Democratic.

That’s one way to look at it. Another way to look at this deduction is as a benefit that redistributes wealth toward states that are self-reliant and away from those that depend most heavily on the federal government. The states with the largest total burden of state and local taxes also tend to be those that receive the smallest amount of federal spending for every dollar they send to Washington. According to the center-right Tax Foundation,

[t]hanks to a steeply progressive federal income tax, states with higher incomes [i.e. blue states, on average –MM] pay vastly higher federal taxes, payments that are unlikely ever to be matched by federal spending directed to those states.

The Tax Foundation regularly produces a ranking of states based on their average tax burden, excluding federal taxes. In 2011, four of the ten states identified as bearing the heaviest burdens – California, Minnesota, New Jersey, and New York – were also among the ten states with the largest net revenue contributions to the federal government, based on tax data from the IRS and spending data from Transparency.gov. Four of the ten states identified as having the lightest burdens – Alabama, Louisiana, South Carolina, and Texas – were among the ten states with the largest net inflow of spending from the federal government (calculations available upon request).

This is just a quick, unscientific exercise, and we can quibble about the best way to measure which states are most “self-reliant.” But they are incredibly suggestive, and provide some support for the intuition that the states that levy the highest taxes on their citizens are also those that are Washington’s largest revenue-raisers. If there’s any redistribution going on here, it’s toward low-tax states. In the absence of the state and local income tax deduction, that redistribution would be even more stark.

Why does this matter? Conservatives are typically champions of devolving as many functions of government as possible to the states, and states that do more for their residents will tend to require more revenue. Yet encouraging states to reduce taxation may incentivize them to shift more of the work of providing public services to the feds. One can understand on a political level why Camp would want to axe this particular piece of the tax code, but he ought to have thought more deeply about the potential policy consequences of doing so.

Rep. Camp has offered a credible template for revamping the tax code. Although his core assumption that complexity is its main defect has come in for some criticism – The New Republic ran a piece for Tax Day presenting survey evidence that most Americans don’t consider it that difficult to do their taxes, and that the ubiquity of tax preparation software could even allow us to implement a system with infinitely many tax brackets without much pushback – it seems like a good idea to regularly reevaluate whether the code makes sense and to pare back some of its kludgy accretions.

Camp is surprisingly honest about the tradeoffs required by any such root-and-branch reform, and is willing to write concrete proposals that take on some of his party’s sacred cows. This is not the plan that I would have come up with, but in a less acrimonious political universe it would offer a reasonable starting point for bipartisan negotiations (I stand by my claim that “reformocons” would have a better chance of getting a hearing in the Democratic Party, but that’s an argument for another day).

Yet whenever Camp indulges in political gimmickry, his plan is consistently the worse for it. Maybe the next congressman to release a brief on tax reform can propose a tax on red meat.