By Marisa Schultz
U.S. Rep. Dave Camp, the mild-mannered Midland Republican, is racing against time to achieve a lofty goal for this year: Persuade a dysfunctional Congress to simplify the tax code.
Tax laws have grown increasingly complex since President Ronald Reagan and a divided Congress in 1986 streamlined the income tax down to two rates and made other changes. In addition, the tax code hasn't kept pace with how Wall Street, international corporations and small companies do business in the 21st century, Camp argues, and has become so complicated most taxpayers can't file taxes without paying for help. About 90 percent of tax filers use tax preparers or software.
"I think the average person should be able to fill out their own taxes without software or hiring a preparer and do it sooner than 13 hours which is what the average time it takes," said Camp, chairman of House Ways and Means since 2011. "How do we have a simpler, fairer, flatter tax code that helps people find work and raises their wages and their economic prosperity? That's what I'm interested in."
Camp has worked with his Senate counterpart, Finance Committee chairman Sen. Max Baucus, D-Mont., to launch a social media and public tour while quietly courting individual members over lunch and beers. But Camp's decision to consider a run for the U.S. Senate in 2014, confirmed Wednesday by his office, prompted the Democratic Senatorial Campaign Committee to warn that bipartisan tax reform would "fall apart should he decide to run."
Through a series of hearings, Camp also has released three policy blueprints to overhaul business, international and financial taxes that have been lauded by many tax experts as benchmarks for reform -- albeit controversial.
"They are a serious attempt to rectify what everybody acknowledges is a severe problem," said Reuven Avi-Yonah, a law professor at the University of Michigan who specializes in international taxation. Avi-Yonah, a Democrat, said he was skeptical about one of Camp's ideas on moving toward a territorial system in taxing offshore business income, but is pleased to see Camp's proposal was limited.
"Each one of these proposals is a genuine attempt to put forth something that can actually be legislated with bipartisan support," he said.
Speaker of House John Boehner has made Camp's tax reform mission a top priority for the GOP-led House. Boehner reserved the first bill number of this session -- H.R. 1 -- for the anticipated legislation.
But challenges remain in gaining the support of a Democratic-controlled Senate and a Republican-led House that have problems passing bipartisan initiatives into law. Unlike 1986 when Reagan visited Capitol Hill personally to lobby for tax reform, President Barack Obama hasn't shown the same passion for tax reform, though he backs changes.
Still, Camp and Baucus are working urgently to move legislation. Baucus is retiring from the Senate and Camp's term as chairman of his tax-writing committee will expire with the new Congress in January 2015.
"I think the two of them would like to have a legacy of substantially simplifying the tax law so that it works better from an economic point of view and simplifies people's lives," said David J. Kautter, managing director of the Kogod Tax Center at American University. "They've gone about it in very wise manner. They are doing everything that's possible within their power to lay the groundwork and build momentum for tax reform. Whether it's enough, nobody knows."
Revenue-neutral reform
Republicans and Democrats have fundamental policy differences. Camp is committed to tax reform being revenue-neutral -- meaning the government would generate the same amount of tax revenue. Obama and other Democrats generally want to change tax rules but dedicate more revenue to fund programs or reduce the deficit.
Camp's goal is to lower income tax rates from a top of 39.6 percent to two brackets -- 10 percent and 25 percent -- and cut the corporate tax rate from 35 percent to 25 percent.
To get there, Camp is putting all tax deductions and credits on the table for elimination -- another point of contention. Such popular measures include the mortgage interest deduction, exclusion of health care and pension contributions, deductions of charitable contributions and state and local taxes and the child and earned income tax credits.
Such deductions cost the federal government more than $1 trillion annually, or about half of what the government collects in all taxes, according to tax analysts.
"We will have to decide is something so important that it's worth either having higher taxes over or raising revenue somewhere else," Camp said.
In 2012, the federal government collected $2.45 trillion in tax revenues and spent $3.54 trillion for a deficit of nearly $1.1 trillion. Nearly half of the revenue (46 percent) came from individual incomes, followed by business and employee FICA payroll taxes at a combined 36 percent and corporate taxes at 10 percent.
"We have some major needs in funding," said U.S. Rep. Sander Levin of Royal Oak, the top Democrat on the Ways and Means Committee. "We have infrastructure needs that are overwhelming. We have needs in terms of education, health research. We need to get rid of the sequester, which is beginning to have a major impact in Michigan. In order to do that, you have to raise revenues."
Camp is wooing members of his own party who want to eliminate the income tax in favor of a consumption tax. Two Michigan members -- U.S. Reps. Tim Walberg, R-Tipton, and Dan Benishek, R-Crystal Falls -- are among the 67 co-sponsors of a "Fair Tax" bill introduced this year that would repeal income, employment and estate taxes and replace them with a national 23 percent sales tax. Walberg says he applauds Camp's work and supports passage of comprehensive tax reform.
"What Dave Camp and Max Baucus are doing is a kind of tax reform, but I would argue it's not really fundamental," said Will McBride, chief economist at the Tax Foundation, who contends the system of taxing income and investments should be replaced. " What they are doing is tweaking the code around the edges."
Camp argues any differences shouldn't shut down reform discussions. Camp and Levin agreed to hold bipartisan working groups on areas of the tax code. Camp is talking with each member of his committee -- Republicans and Democrats -- as well as courting each GOP freshmen with one-on-one sessions.
Camp and Baucus have launched a Twitter handle, website (taxreform.gov) and kicked off a public tour this summer to drum up support for reform.
"There is no better partner than Dave Camp to simplify taxes for American families and businesses and modernize the code to make our country more competitive," Baucus said. "We've formed a true friendship over the past few years working together."
Rogers backs Camp
To help his effort, Camp backs keeping the same level of progressivity in the tax code -- meaning the highest earners will continue to pay the bulk of income taxes.
Last year, those making $200,000 and above comprised 4 percent of tax filers, but they paid about 57 percent of income taxes. Those making $40,000 or less a year in income comprised 45 percent of taxpayers but didn't contribute any federal income tax. This is the basis for Republican candidate Mitt Romney's 47 percent comments during last year's presidential campaign.
U.S. Rep. Mike Rogers, R-Howell, argues if anyone can make tax reform happen in the House, it's Camp.
"It's a hard thing to corral people on and he's doing an exceptionally good job," said Rogers, chairman of the House Intelligence Committee. "He's getting buy-in by all the people impacted, and he's taking his time and doing it right. I know he has the credibility in Congress to pull this thing across the finish line."
Camp's tax proposals
Rep. Dave Camp, chairman of the House Ways and Means Committee, released three draft proposals in his effort to reform the tax code.
International taxation: Camp's proposal would move the U.S. from a worldwide to a more territorial system for taxing multinational companies. His plan aims to tackle two pressing issues: The U.S. having the highest corporate tax rate of the developed world and multinational companies parking an estimated $1.7 trillion overseas to avoid higher U.S. taxes. U.S. companies with overseas earnings are taxed at the foreign country's lower rate. But if the company wants to bring those earnings back, it's subject to the 35 percent U.S. corporate tax, minus the tax rate the company paid abroad. Camp proposes lowering the overall corporate tax rate to 25 percent. That rate would apply to all domestic earnings, while most overseas profits -- which have been taxed by the foreign country -- would be exempt, leaving an effective 1.25 percent tax on foreign dividends. Camp also offers three options for "anti-abuse" rules to ensure companies do not avoid paying their share of U.S. taxes, including a President Barack Obama proposal. "The hope is that it will discourage multinationals from putting their money overseas for no reason unless they really need it there and will enable them to bring the money back home," said Reuven Avi-Yonah, a law professor at the University of Michigan who specializes in international taxation.
Taxing Wall Street: Camp's second draft aimed to tax financial products with more uniform and specific rules. The dated tax code has plenty of gray areas and wasn't designed with today's creative Wall Street financial instruments in mind, said David J. Kautter, managing director of the Kogod Tax Center at American University. "Derivatives are blamed in large part for the financial crisis," Kautter said. "So the idea is maybe we should make sure the tax law doesn't encourage financial instruments that are irresponsible from an economic point of view."
Small Businesses: Camp's third draft proposal is designed to clean up the tax rules for small businesses, where owners pay taxes on their individual returns. Small businesses are organized in three categories: Sole proprietors, partnerships (i.e., law and accounting firms) and S-corporations (small companies with individual shareholders). In all three, business income "passes through" the owner, partners or the individual shareholders who file personal income taxes. The proposal has wide impact. The majority of U.S. businesses are organized as pass-through entities and they employ about half the nation's workforce. The trouble, said Kautter, is the partnership rules are exceedingly complicated and have a history of being used for tax sheltering and manipulation. Camp laid out ways to simplify tax compliance and achieve uniformity between S-corporations and partnerships. The first option would tweak the rules on how partnerships operate and the second would throw out the way partnerships and S-corporations pay taxes in favor of new uniform rules.
Sources: House Ways and Means Committee, Reuven Avi-Yonah and David J. Kautter