Trump, Cruz and Sanders: Tax Plans Tell the Story

Trump, Cruz and Sanders: Tax Plans Tell the Story

Original Article on TheStreet

It’s not a sexy topic, but tax reform gets to the heart of the divide between Trump and Cruz, Clinton and Sanders.

Radical proposals in tax policy might be non-starters for some, but Dave Camp, the former Republican chairman of the House Ways and Means Committee, says he’s encouraged by the ambitious tax plans coming from the leading presidential candidates of either party. Both the Trump and Sanders campaigns, he said, have highlighted deep frustration with economic policy, and tax reform, he says, can address this anger.

“What you’ve gotten are campaign proposals that aren’t necessarily legislative proposals,” Camp, currently a senior policy advisor to PriceWaterhouseCoopers‘ tax policy practice, said in a phone interview from Washington. “While the concerns they’re raising are somewhat similar, the solutions are different, but I do think there’s a common sense that our tax code is broken.”

In an effort to fix that tax code, Camp delivered a far-reaching 194-page tax reform proposal to his Republican colleagues just prior to leaving the House in 2014 after 12 terms in Congress. Camp’s plan, though, was dead-on-arrival for a Republican leadership that viewed his proposal as either too harsh on corporations and wealthy individuals, or a needless opportunity for President Obama to fashion another piece of landmark legislation. There hasn’t been a comprehensive overhaul of the U.S. tax code since 1986.

While Camp’s plan is worth rehashing, the root of the tax reform debate is really a question of whether cutting taxes generates economic growth, and whether federal policy address income inequality. In light of voter attention to stagnant wages, politicians on both sides of the aisle have acknowledged that income inequality isn’t good for the future of the U.S. economy.

When I asked Camp whether tax cuts spur growth, he cited the work of Larry Lindsey, the George W. Bush economic adviser turned Washington consultant who was once as central to policy debates as Elizabeth Warren. Lindsey was the engine behind the Bush tax cuts of 2001 and 2003, arguing that given more money, the wealthy and corporations will energetically invest in growing the economy. Not everyone agrees with this contention. A recent report on 65 years of economic data around taxes and economic growth showed that there’s much more to growth than tax policy and that cutting taxes has often coincided with slowed growth

Republicans led by Ted Cruz, Marco Rubio and Rand Paul early in the presidential campaign called for cutting the corporate tax rate in half. Camp’s Tax Reform Act of 2014 proposed dropping it to 25% from 35%. 

U.S. companies routinely cite the 35% tax on income earned abroad as the reason they choose to keep more than $2 trillion in tax havens rather than repatriating that money back to the U.S. Unlike most developed countries, the U.S. taxes corporate income earned in the U.S. at the same rate as income earned abroad.

Camp’s plan would establish a permanent non-U.S. corporate rate of 8.5% (though others have suggested 10%). To maintain the current system, he said, is to invite more of the tax-avoiding corporate inversions that Clinton, Sanders, and Trump have condemned.

“We can’t continue on the path where we’re so different than rest of the world, or we’ll continue to see corporation re-domicile to other countries,” Camp said. “By making these changes, we could actually grow the economy, increase revenue to the government, increase jobs and increase incomes for individuals.”

Leading Democratic candidate Hillary Clinton, were she elected president, has said she would only agree to a corporate tax reform that was revenue-positive. In other words, getting corporations and wealthy individuals to pay more, overall, not less then they do currently. Camp admitted his plan may or may not be revenue-neutral, depending on how it’s evaluated.

But if the corporate rate is to be lowered, or even cut for non-U.S. profits, Democrats are going to want to address a host of income tax deductions that Camp acknowledged are used almost exclusively by large corporations and wealthy individuals to pay less taxes.

Chief among them is the “carried interest” tax loophole that allows private equity partners to treat their income as capital gains. Camp’s plan called for its removal while also raising taxes on large banks, eliminating some restrictions on self-employed individuals from avoiding income taxes and requiring some high-income individuals to pay taxes on municipal bonds.

Camp also proposed slapping a 10% surtax on some joint-incomes greater than $450,000 a year, more progressive than a proposal than Clinton made in January. (Hers called for a 4% tax on incomes over $5 million.)

Democrats are certain to like all of that. But can compromise between the parties be made when ideologies are so far apart? Here are some facts:

Last year, corporate income tax revenue was 1.9% of GDP. In 1952, it was 5.9%, according to a study by the liberal Economic Policy Institute. During that time, corporate taxes as a portion of federal revenue has dropped to 11% from 32%, according to an Oxfam study published on April 14. Meanwhile, the top 1% of earners take home more than 20% of the country’s total income, and their share has more than doubled over the past 35 years.

Camp pointed out that median income has been flat for a decade while economic growth has averaged a tepid 2%. Out of Congress, yet still lobbying for his goals, Camp says the next administration is likely to produce a “significant tax bill” in its first year.

The question is whether there will be a political climate to enact it.

“Maybe when we get to the fall, we’ll see a discussion of tax policy emerge again because it’s so important to why so many people think the country isn’t going in the right direction,” he said. “Jobs and the economy will be a key issue, and tax reform is one thing that can help with that.”