BusinessThe Economy Hub

The simple math that tells you the new GOP tax plan is a scam

PoliticsElectionsDave CampInternal Revenue ServiceScienceU.S. CongressRepublican Party

The long-awaited Republican tax reform plan was released today by House Ways and Means Committee Chairman Dave Camp (R-Mich). It's being hailed as a breakthrough in putting real reform on the table, but also being instantly eulogized as dead-on-arrival in a Congress that wants no part of any tax reform, now or ever. 

Still, it's instructive to examine the Camp plan for a primer on the latest mathematical trickery aimed at making something that preserves, even enhances, tax benefits for the wealthy appear instead to be a tax increase for the wealthy. Nice try, Congressman Dave.

Here's the easiest calculation. Camp says he's eliminating the preferential tax rate on capital gains, and taxing them the same as ordinary income. That would be a big philosophical change and a big tax hike on the rich, if it were true. 

It's not true.

Camp's plan exempts 40% of capital gains (and investment dividends) from any taxation at all. How does this work out in real numbers? The top marginal tax rate on married taxpayers today is 39.6% (couples with more than $457,600 income). The top capital gains rate is 20%. 

Camp wants to cut the top marginal rate to 35%. If you tax capital gains at 35%, but exempt 40% of them from any tax, your effective rate on all capital gains works out to (... wait for i t...) 21%. In other words, Camp is raising the standard cap gains rate by a single percentage point. But since he's also cutting the top rate on all income by nearly five percentage points, rich taxpayers still come out ahead.

Camp acknowledges that his plan results in a "three percentage-point decrease from the maximum rate" individuals pay on investment income today, but his math on that is a little murky. He is leaving in place the new 3.8% surcharge on unearned income, including cap gains, levied on households earning more than $250,000 to pay for Medicare.

What's especially stealthy about this tax break is that capital gains and other investment income account for a far higher share of total income for the wealthy than for average taxpayers.

According to IRS statistics for 2011 (the latest published), taxpayers earning between $75,000 and $100,000 received less than 1% of their income from the sales of capital assets on average, and 77% from wages and salary. For the average taxpayer in the $1 million to $1.5 million range, capital gains were more than 11% of income, and wages and salary less than half. For the taxpayer reporting $10 million or more, cap gains accounted for nearly half of all income, and wages and salary only 17%.

Camp also proposes tinkering with tax deductions and increasing the standard deduction; we'll leave it to Washington's cadre of expert number-crunchers to determine how each of these provisions affects taxpayers at various income levels. But Camp is candid about wishing to "flatten" tax rates -- that is, make them less progressive.

That's a dead giveaway that this plan benefits the rich more than anyone else, because it continues a long-term trend toward relieving them of their share of the overall tax burden. This has been documented by Emmanuel Saez of UC Berkeley; a graphic representation of the decline in the U.S. tax system's progressivity from 1970 to 2004 can be found here.

Camp also tries to slip a few other bennies for the wealthy into his tax plan, possibly hoping that no one will read that deeply into the text. But keep an eye out for the changes he makes in the rules for 501(c)4 "social welfare" nonprofits.

These organizations have been turned into conduits for huge donations to political campaigns because they're allowed to keep their donors secret from the public, though not from the IRS. They landed at the center of the fabricated "scandal" over IRS screening of political groups, mostly because the IRS wasn't given the legislative guidance or the resources effectively to distinguish groups that were really political, which aren't eligible for 501(c)4 tax or secrecy benefits, from genuine social agencies, which are. 

Camp would make the job of the IRS harder. He would ease the registration process for C-4s, and allow them to keep almost all their donors secret not only from the public, but from the IRS too. This is really sleazy of him. It gives rich political campaign donors more of a shield from the law than they deserve, and much more than is healthy for the public interest. If there were a single reason to laugh this tax "reform" off the table, this would be it. 

Reach me at @hiltzikm on Twitter, Facebook, Google+ or by email. MORE FROM MICHAEL HILTZIK

Obamacare success stories you haven't read

The toll of the anti-vaccination movement, in one scary map

Net neutrality is dead. Bow to Comcast and Verizon, your overlords

Copyright © 2014, Los Angeles Times
Related Content
PoliticsElectionsDave CampInternal Revenue ServiceScienceU.S. CongressRepublican Party
Comments
Loading