Robert Samuelson March 5, 2013

In a curious way, the sweeping “tax reform” plan unveiled recently by Rep. Dave Camp, the Republican chairman of the House Ways and Means Committee,demonstrates why half measures won’t do. The income tax has become,through its many deductions, credits and exclusions, a citadel ofpolitical power by which Congress and the White House reward and punishvarious groups and causes. Unless we break decisively with this system,it will survive even energetic efforts at streamlining. That’s what Camp offers, and I don’t think it’s enough.

He would convert seven tax rates (from 10 percent to 39.6 percent) into three: 10 percent, 25 percent and 35 percent. To finance these reductions,some tax breaks would be curbed. The deduction for state and local taxes would go. The home-mortgage interest rate deduction would be reduced by limiting its eligibility to loans up to $500,000, down from $1 millionnow. (Existing mortgages would be grandfathered.) Charitable deductions would apply only to contributions exceeding 2 percent of taxpayers’ adjusted gross income.

Camp’s plan would represent an improvement. The share of taxpayers who itemize would drop from roughly one-third to about 5 percent. This would be ahuge gain in simplification. (To encourage this shift, the plan would increase the standard deduction from 2013’s $12,200 for a couple to $22,000.) Still, Camp’s tax system would resemble today’s. It would be complex and have high rates. Thesurviving mortgage and charitable deductions are examples of enduringcomplexity.

By design, Camp’s plan matches today’s tax burden onthe rich, middle class and poor. It also roughly duplicates the amountof revenue raised. These goals could be achieved with lower rates — say, a top rate of 25 percent — but that would require dramatic basebroadening, including, I think, at least the following: eliminating allmortgage interest rate and charitable deductions; taxingemployer-provided health insurance; and ending preferential rates oncapital gains (profits on the sale of stocks and other assets).

Proposing this, it’s said, would be political suicide. I dissent. Camp hasalready antagonized powerful groups by endorsing cuts in existingpreferences. Homebuilders and realtors will resist limits on themortgage interest rate deduction. Churches, colleges and othernonprofits will denounce tightening the charitable deduction. I doubtthe opposition would be much stronger if Camp urged complete repeal ofthese tax breaks.

If you’re going to fight this battle, you might as well seize the moral high ground by taking a stand on principle.What’s at issue is the nature of the tax system. Do we want a relatively simple system that raises the government’s revenues as efficiently aspossible while minimizing interference with the economy and privatedecisions by households and firms? Or do we want a system that empowersCongress to micromanage the economy and turns tax breaks — oftenineffective — into political handouts?

Someone has to make thecase for simplicity and restraint because most politicians embracecomplexity and empowerment. We’ve been here before. Under the Tax Reform Act of 1986, tax breaks were eliminated and the top rate lowered from 50 percent to28 percent. The legislation was bipartisan, supported by PresidentReagan and congressional members of both parties. But President Clinton sabotaged this system by successfully championing a top rate of 39.6 percent and backing newtax breaks. President Obama follows the same script: higher rates, morebreaks.

Of course, the choice isn’t either/or. Although I favor a simpler system, I would retain a few major preferences that supportoverriding national goals. One would be the earned-income tax credit(EITC), which serves as a wage subsidy for low-income workers. Makingwork more attractive to the low-skilled is in everyone’s interest.Another would be tax preferences for contributions to retirementaccounts. Without this lure, millions of Americans wouldn’t save fortheir later years.

But our system is a far cry from thisbare-bones approach. There are tax breaks for electric cars, collegetuition, adoption, moving expenses and energy efficiency, among others.And, of course, businesses enjoy many tax breaks (the subject of afuture column). Some preferences promote worthy causes, but collectively they impose a sizable cost, as more time and expense go to unproductive tax planning, compliance and lobbying.

Tax preferences are soembedded in the nation’s political, economic and social fabric that,under any circumstances, passing even the mild Camp plan would face long odds. Politicians won’t meekly surrender this form of power. Nor willrecipient constituencies spontaneously cede their advantages. Still, the odds could be shortened if we were bolder and had to muster publicsupport for a genuine overhaul, not just a tinkering.

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