Sunday, March 2, 2014

Tax Reform Act of 2013: The Deeper You Dig, The Worse It Gets

This week, Rep. Dave Camp (R-MI), chairman of the House Ways and Means Committee, released a proposal for tax reform.

I want to make a plea to the reader, at this point: In any discussion of tax policy, there is an urge to gloss over the details of any proposal, in favor of one's own preferred tax concept; some thought to the effect, "It isn't (insert preferred tax plan), so who cares? It isn't real reform". Most readers of this blog are either supporters of a low-rate flat tax, or Fair Tax. I'm a flat-taxer; I'd love to see our tax code reduced to several hundred pages. That said, I ask the reader, for the moment, to banish any thought regarding the "optimal" tax code and focus solely on what is in front of us: this bill. Let's focus on what's 'on our plate'. Failure to do so will mean missing the important details in this legislation.

I can't possibly cover the entirety of the proposal in a blog post. The discussion draft of the bill (PDF) is roughly 1,000 pages. The summary (PDF), to which I will refer, is almost 200 pages. I encourage the reader, if interested, to read them and draw one's own conclusions.

To sum up this bill briefly: I'm shocked it's been introduced by a Republican, especially one like Dave Camp, who has been extensively involved in advocating against the IRS' attack on conservative groups. This reads like a Democrat tax bill. It accomplishes the liberal tax agenda, while using extensive doublespeak to call such changes 'reform'.

Let's pick through the important points, section by section.

First, the bill proposes to simplify the current seven tax brackets, ranging from 10% to 39.4%, to three brackets: 10%, 25%, and 35%. Anyone in the previous 15% bracket would have their rate reduced to 10%; the 28%, 33%, and 35% brackets would be consolidated into the new 25% bracket; and the 39.4% bracket would be reduced to 35%. Not nearly enough of a tax cut, I agree, but it's something.

Or is it?

Read further, and one discovers that the new 35% bracket would disqualify the taxpayer from claiming most deductions. Translation: The effective rate, or "real" rate of taxation, would go up for top-bracket taxpayers. It's a tax increase, disguised as a small tax cut. Additionally, it would phase out the lower bracket tax advantage for higher income earners; meaning, as one's income increases, one gets closer and closer to paying a 35% flat tax, effectively, since eventually all income, not just income in the top bracket, would be taxed at the top-bracket rate.

Additionally, it proposes to eliminate the capital gains tax rates, and substitute with a percentage reduction from marginal tax rates. Translation: Capital gains would be taxed as regular income, albeit at a discount. It's still an increase in tax on capital gains- a purely Democratic tax goal (remember the Warren Buffet "I pay less than my secretary does" fiasco?).

So, how would a Republican get away with proposing this? By overshadowing it with a NEW AND REVOLUTIONARY! tax provision: "Modified Adjusted Gross Income", or MAGI. What is MAGI? It's like the old adjusted gross income (AGI), except that it also deducts charitable contributions and "qualified domestic manufacturing income" (QDMI).

What is QDMI?

Domestic manufacturing gross receipts would include gross receipts derived from (1) any lease, rental, license, sale, exchange, or other disposition of tangible personal property that is manufactured, produced, grown, or extracted by the taxpayer in whole or in significant part within the United States, or (2) construction of real property in the United States as part of the active conduct of a construction trade or business.

Translation: Income from manufacturing, retail, home construction, and rental businesses would be taxed at the 25-percent rate and still be eligible for deductions. Some might argue that this "stimulus" of key sectors of the economy is good for the economy. I call it "central planning".

Income that either is net earnings from self-employment (...) would not qualify as QDMI.

In other words, if you're self-employed in manufacturing, retail, rental, or construction, you don't qualify. This provision is merely a giveaway to those whose incomes are derived from "key sector" businesses- and that group is littered with Democrat campaign donors.

How much effect will all of this have on revenue? Hard to say, since the summary lumps all of these changes together into one (totally meaningless) revenue calculation, instead of addressing them individually.


On the flip side- regarding lower-income earners- the bill is very generous. It proposes to 'reform' tax benefits for families by eliminating head of household filing status and additional standard deduction, and consolidating several incentives into three: a larger standard deduction, a tax credit for single parents, and a new "child and dependents" tax credit, as well as a modification of earned income tax credit (EITC).

The new standard deduction would be $11,000 for single tax payers and $22,000 for married filing jointly. Single parents could claim an additional deduction of $5,500 without having to itemize deductions. However, the single parent deduction phases out by $1 for every $1 of income over $30,000. Translation: No incentive if your income exceeds $35,500.

Three important points regarding the changes to tax benefits:

1) The new child tax credit contains the most obvious doublespeak in the whole bill:
To reduce waste, fraud, and abuse, a taxpayer would be required to provide his SSN, but not an SSN for the child or dependent, to claim the refundable portion of the credit.

Read that sentence again.

The proposal eliminates the one safeguard against fraudulent claiming of the credit- the requirement to provide a child's social security number. In other words, it claims to "reduce waste, fraud, and abuse" by eliminating the requirement to reduce "waste, fraud, and abuse". Doublespeak is an old Democrat standby.

2) This "reform" costs the taxpayers $1.22 TRILLION over ten years (combination of reduced revenues and increased outlays, excluding the changes to EITC). Another trillion dollars of spending on, essentially, a welfare program- another Democrat tax proposal.

How does the bill address this expenditure? By taxing the rich more, of course (another Democrat tax goal). Specifically, by phasing out personal deductions for income above $250,000 (part of the flattening of the top bracket I mentioned above). This phase-out would decrease outlays or enhance revenue by $987.2 Billion over ten years.

3) The proposed changes to EITC are thoroughly absurd. It proposes to convert EITC into a credit against payroll taxes (remember the Democrats' ill-conceived payroll tax holiday?), as well as a refundable credit against employers' payroll taxes. You read that right: The low-wage employee (with at least one child) can get a portion of the payroll taxes paid by the employer.

Consider the impact of this: If you are an employer struggling to make a profit (as so many employers are, these days), you can avoid the necessity of giving your low-wage employees a pay raise (which would increase your payroll taxes as well) because they'll get more money by claiming a credit against the payroll taxes you've paid. Translation: It's a subsidy for keeping wages low, giving Democrats an opportunity, down the road, to claim for the umpteenth time that employers are "greedy" for not paying "a living wage". Machiavellian- and a stock-standard Democrat scheme.


On retirement savings accounts: The bill proposes to eliminate certain kinds of retirement accounts to streamline tax-privileged retirement options. That, in itself, is a reasonable goal.

The problem? The changes proposed will increase revenues by an estimated $228.4 Billion over ten years. Translation: $228 Billion in new tax revenue from changes in retirement account rules. Taxing private retirement accounts will, naturally, increase dependence on government retirement- Social Security. This is another Democratic tax policy goal.


On corporate taxes: There's big news here: A top rate of 25%. This is good, in comparison to the current highest-in-the-world rate of 35%. This will get a lot of folks enthusiastic about tax reform.

This is, of course, another standard Democrat ploy: Give a big positive to conceal all the negatives.

In this case, greater tax burden on energy producers, which will cause energy rates to "necessarily skyrocket" (to quote then-Senator Barack Obama). Elimination of the 50-percent expense rule for refinery costs and advanced mine safety equipment. Translation: Instead of being able to deduct 50% of the cost immediately from taxes, these (enormous) expenses would be deducted from taxes over the service life of the equipment (a period of many years). This means a large additional tax burden on already-struggling coal mining and fuel refining businesses- another Democrat end-goal.

Farms, by Democrat design, are also struggling, and have been for decades. This bill would eliminate the immediate expense rule for fertilizer, adding to their tax burden.

Logging is also a severely-struggling business. Democrats hate logging, which is why this bill changes the rules on timber cutting to treat it as ordinary income instead of capital gains- meaning, a huge tax hike on the logging industry.

Also, "environmental remediation costs", such as asbestos removal, would have to be expensed over a period of 40 years. Until 2012, the costs could be deducted from taxes in the current year. We already know President Obama is using the EPA to target businesses. This "doubles-down" that power, by eliminating the immediate tax break for expenditures demanded by the EPA.

Democrats can't resist taking a swipe at the natural gas industry, either. Like the proposal to eliminate the percentage depletion rule for property where oil and natural gas are extracted, and repeal of the passive activity exception for oil and gas properties.


So, let's review: a "tax reform bill" which raises taxes on upper income earners while purporting to lower their taxes; which will likely push more low-income earners into the (currently 47%) pool who pay no taxes; more government 'stimulus' of certain sectors of the economy; a trillion-plus-dollar increase in welfare spending via the tax code; almost a quarter-trillion-dollar additional tax burden on individual retirements; and greater tax burdens on logging, mining, farming, and energy production.

It must be said, most of these deductions would be eliminated, if we were actually transitioning to a flat income tax code. But "flat income tax" denotes a very low, universal rate. Camp may call this bill "flattening" of the tax code, but it isn't, except for "flattening" the top bracket to generate more revenue.

I think Chairman Camp ought to change his party affiliation.

(Photo credit: Wikipedia)

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