Update: an earlier version of this document did not take into account the outlay effects of the Camp draft on its net revenue score. The Camp draft is a net tax cut and a net spending cut.
 
House Ways and Means Committee Chairman Dave Camp (R-Mich.) today released his anticipated comprehensive tax reform discussion draft. Chairman Camp and his staff are to be commended for putting pen to paper to produce a detailed tax reform plan.
 
However, the Camp draft would severely hamstring capital investment, unnecessarily damaging potential economic growth over the long run.
 
The Camp draft has many commendable elements, but other features are less compatible with a pro-growth model.  Many of the latter issues could be addressed (and no doubt would have been) had Camp not been constrained by arbitrary and inaccurate Beltway tax scoring conventions.
 
What the Camp Draft Gets Right:
 
-Dynamic growth effects make the country wealthier.  The Joint Committee on Taxation’s (JCT) first-ever “dynamic score” (that is, incorporating the macroeconomic effect of tax policy changes) shows that the Camp draft raises household income, increases labor force participation, grows private sector employment, and boosts real economic growth.
 
-Personal income tax top rate cut from 39.6 percent to 35 percent.  The plan replaces our current seven-bracket personal income tax structure with a simplified three-bracket model at lower rates across the board.
 
-Virtually all taxpayers could fill out a simple, standard deduction tax form.  The percentage of taxpayers who don’t have to record itemized deductions would rise from 70 percent today to 95 percent under the Camp draft.  As a result of this and other simplifications, the Camp draft claims a reduction in the size of the tax code by fully one-quarter.
 
-Corporate income tax rate cut from 35 percent to 25 percent.  This is badly needed, as the United States has the highest corporate income tax rate in the developed world.  It moves the U.S. rate closer to the developed nation average, and closer to the rates imposed by our most important trading partners.
 
-AMT repealed.  Both the personal and corporate “alternative minimum taxes” (AMT) are repealed.  Thus, it is finally ended for millions of families the “heads the government wins, tails the taxpayer loses” parallel tax system originally imposed on a few hundred wealthy Americans.
 
-Moves U.S. system closer to territoriality.  The U.S. is virtually the only nation in the developed world which seeks to tax the income her taxpayers earn overseas.  This potential double-taxation puts U.S. employers at a global competitive disadvantage.  The Camp draft addresses this by shielding 95 percent of active trade or business income earned abroad from IRS taxation.
 
-Permanent small business expensing.  Small and medium-sized firms will be able to immediately deduct (“expense”) business assets (up to $250,000) purchased throughout the year.  The alternative is to force them to slowly-deduct (“depreciate”) these costs over several to many years.  ATR believes that all business expenses should be deducted in the year they are incurred.
 
-No more free rides for bloated state governments.  For years, state governments have hidden their costs of government from their taxpayers.  The federal tax code has allowed state and local income taxes to be deducted, and the interest on state and local debt to be excluded from income, making state government seem cheaper than it really is.  The Camp draft ends the deduction for state and local income tax, and denies the exclusion for municipal bond interest to top-bracket taxpayers.
 
-No IRS preparation of tax returns.  The Camp draft endorses the IRS “Free File” program which has benefited millions of taxpayers, and prevents a government takeover of tax preparation (which would give the IRS power to both calculate and assess taxes).
 
-Two Obamacare taxes are repealed.  Both the “medical device tax” (a gross receipts tax on makers of medical devices like pacemakers and wheelchairs) and the “medicine cabinet tax” (prevents over-the-counter medicines from receiving equal tax treatment) are repealed.
 
Where the Camp Draft Falls Short:
 
-The Camp draft nets out to a small tax increase in the scoring window.  According to the JCT, the Camp draft is a net tax increase of $3 billion over the first decade of implementation.  As the Camp draft is translated to “real bullets” legislation, taxpayers should expect this to be smoothed out to no higher than revenue-neutral.
 
-Capital gains and dividends tax rate rises.  Today, the top marginal income tax rate on capital gains and dividends is 23.8 percent.  Under the Camp draft, this rises to 24.8 percent.
 
-Camp draft moves the wrong way on business investment.  The Camp draft lengthens depreciation lives for business assets, moving in precisely the opposite direction of where tax reform should go.  All business inputs should be expensed the year they are incurred.  Under the Camp draft, a desk (for example) would have to be depreciated over twelve years as opposed to the current seven, and using a straight-line recovery instead of an accelerated one.  For residential real estate property, it’s even worse.  The Camp draft requires this property to be depreciated over 40 years, as opposed to today’s 27.5 years.
In addition, “bonus” depreciation and other special accelerated depreciation rules are repealed.
 
Intangible property also faces a lengthened recovery period, from 15 years today to 20 years in the Camp draft.  These should also be expensed the first year like any other business purchase.
To its credit, the Camp draft does allow the basis of depreciable property to be indexed to inflation.
 
-Business capital in the economy shrinks under the Camp draft.  As a result of tax increases on capital gains and dividends, and tax increases on business investment, the JCT dynamic score assumes that business capital will shrink.  This is highly problematic, since capital is the seed corn of future economic growth.  It’s true that labor force and consumption growth is big enough to overwhelm this effect at least in the shorter run, but no tax reform plan should be increasing the taxation of capital.  This was a big mistake from the 1986 Tax Reform Act, and it’s a big mistake here.
 
-Corporations get better tax rates than other companies.  The tax code should not pick winners and losers, especially when it comes to something like business entity formation choices.  Yet the Camp draft does precisely that.  Whereas corporations get a 25 percent rate, successful partnerships and S-corporations will face a 35 percent top rate (plus a 3.8 percentage point Obamacare surtax in most cases).  Additionally, manufacturers get a more favorable tax rate than other industries.
 
-“Chained CPI” means that households will face greater “bracket creep.”  The Camp draft imposes “chained CPI” (a slower growth metric for inflation) on the tax brackets and other tax provisions.  Over time, this will result in taxpayers moving into higher brackets faster than they would under regular inflation calculations.
 
-“Carried interest” capital gains tax hike.  Some investment partnerships generate capital gains which are paid to managing partners.  The Camp draft seeks to substantially tax this income not as the capital gains it actually is, but as ordinary income.  That’s a rate hike from 24.8 percent to 38.8 percent in a post-reform world.
 
-Business owners will pay taxes on “phantom income.”  One provision in the Camp draft which is very troubling is to move many companies from a “cash basis” of accounting to an “accrual basis” of accounting.  Oversimplified, this means that these companies will no longer pay taxes on income they receive in a tax year.  Rather, they will pay taxes on income they have billed out (but may not have yet actually received).  In many cases, the money might not be received for years, but the taxes are due in the present.  This new rule impacts white-collar partnerships and S-corporations who have gross receipts of at least $10 million.
 
-Energy and other companies will face taxes on phantom “LIFO” income.  Companies which have valued their inventories over the years using a “last-in, first-out” (LIFO) convention will have to pay taxes on the cumulative difference between LIFO and FIFO (“first-in, first-out”) inventory accounting.  This isn’t real income—it’s akin to asking taxpayers to pay back the mortgage interest deduction they’ve claimed on a home they’ve owned for many years.
 
-New “bank tax” on firms will be passed along to customers.  The Camp draft creates a new “bank tax” on financial services firms with more than $500 billion in assets.  The tax is an asset tax of 0.035 percent of financial assets at the firm.  It’s a basic principle of taxation that “companies don’t pay taxes—people do.”  That’s the case here.  This new bank tax will come out in the wash in higher ATM fees, fatter commissions for stock brokers, and more nickel and diming for average investors.