WASHINGTON — Rep. Dave Camp's draft tax reform plan, which is advertised as revenue-neutral, would actually substantially reduce revenues and increase the budget deficit after 10 years, the former counsel of a tax-writing committee said at hearing on Tuesday.
The draft plan, released in late February by Camp, R-Mich., the chairman of the House Ways and Means Committee, would drop the top individual income tax rate to 25%, while repealing the tax exemption for new private-activity bonds and advancing refunding bonds and taking other actions to raise revenues and offset the revenue losses from the lower rate.
But John Buckley, former chief counsel for the Democrats on the committee, told Senate Budget Committee members during a hearing on tax reform: "If the permanent tax benefits and permanent tax increases in the Camp reform plan were netted, it would show a permanent tax reduction over the 10-year window of well over $1 trillion."
Camp urged budget committee chairman Patty Murray, D-Wash., to play a major role in the tax reform debate, warning any resulting legislation will likely impact the nation's long-term fiscal situation and entitlement programs.
The Camp draft plan contains a substantial amount of one-time tax increases, Buckley told committee members. It also contains a large number of timing changes, many of which reflect temporary tax increases in the 10-year budget window as a result of the transition to new rules, he said.
Buckley said Camp's plan is modeled after the 1986 Tax Reform Act, which Buckley helped develop. Both the act and draft plan, for example, contain a significant net tax increase on business income to finance reductions in personal income taxes.
"I would argue that the 1986 Tax Reform Act is at best an imperfect model for future tax reform efforts" because it "was a product of some unique circumstances," Buckley wrote in his testimony. In 1986, Congress was able to pursue revenue-neutral tax reform in part because it had enacted major tax increases in 1982 and 1984. Also in 1983, it restructured the Social Security system, resulting in both benefit reductions and revenue increases. Further, the Congressional Budget Office's budget projections in 1986 were 28 years further out than now, according to Buckley.
Congress was able to finance the rate reductions in the 1986 act by addressing widespread tax sheltering and other "loopholes," Buckley wrote. "In contrast to 1986, many of the so-called base broadeners or 'tax expenditures' under consideration in the current discussion of tax reform are long-standing features of our system embedded in the fabric of our economy." The tax expenditures include the exclusion from income of tax-exempt municipal bond interest.
Buckley told committee members that the 1986 act "failed in two major respects." First, "it did not result in a stable rate structure. The reversal of rate reductions started fairly quickly," he wrote, and second, "the economic benefits predicted from the rate reductions and base broadening ... simply never materialized."
Buckley said most past major tax legislation has been shaped by supply side principles and the notion that market outcomes not affected by tax incentives offer the best path for economic growth. An underlying assumption is that the amount of output is determined by the availability of labor and capital and that the demand for labor and capital will equal supply.
However, echoing a recent article by Sandille Hlatshwayo and Nobel Laureate economist Michael Spence, Buckley said the global economy has an abundance of human resources and they are becoming accessible as time goes on.
The question for tax reform is whether the problem facing this country is lack of labor supply or reduced employment opportunities, which tends to reduce labor supply. "The Spence article makes a convincing case that the lack of employment opportunities is our main challenge," Buckley wrote.
