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Tax Reform: Republicans Abandon Their Own Baby

02/27/2014 11:12 am ET | Updated Apr 29, 2014

Remember the Republican promises about comprehensive tax reform? A flatter, simple tax code. Lower rates, paid for by closing loopholes. Well, never mind.

For years, Republican candidates have pledged comprehensive tax reform that would offer lower rates paid for by closing loopholes. They've rejected any effort to close obscene dodges in the tax code arguing that had to be part of comprehensive tax reform. From the Romney campaign, the Ryan budgets, to endless stump speeches, they promised to lower rates paid for by what became known the "magic asterisk" -- details on what loopholes get eliminated to come later. Did they really have the stomach to take on the lobbies that would mobilize to protect their piece of the tax code?

Well, now we know. When Dave Camp, Republican Chair of the House Ways and Means Committee, unveiled comprehensive tax reform three years in the making, Republicans ran for the exits. Senate leader Mitch McConnell announced, "I have no hope for that happening this year." House Speaker John Boehner did his imitation of a 5-year-old, muttering "blah, blah, blah" when asked on about the details of the Camp reform, saying that this was only the "beginning of a conversation, a discussion draft." That's the Republican position: Comprehensive tax reform, flatter, simpler lower taxes, centerpiece of the Republican growth agenda -- ah, forgeddaboutit.

What did Camp's bill contain that so rattled his Republicans? He followed much of the Republican partisan playbook -- ending the exemption for state and local taxes that would hurt higher tax blue states like New York and Massachusetts, limiting the tax break for employer based insurance, even cruelly lowering the Earned Income Tax Credit for the lowest wage workers.

But that wasn't enough to pay for the lower rates. He had to create a third rate -- 35 percent --for the rich (more than $400,000). He would levy a special tax on the biggest banks and insurance companies -- those with over $500 billion in assets, essentially taxing them on the risk they pose to the economy. He would hit multinationals with a (small) tax on the $2 trillion they have stashed abroad to avoid taxes, while transitioning to a new (wrong-headed) scheme. He'd slow the write off of corporate jets and end the obscene carried interest tax deduction for hedge fund honchos. These all echo proposals made by Barack Obama, so no wonder Republicans immediately jumped ship.

The Camp tax proposal also exposes the false assumptions around tax reform -- assumptions that too often gain bipartisan support. Here are five common sense propositions that comprehensive tax reform offends.

1. Tax reform should produce more revenue

Camp's comprehensive tax reform is designed to be "revenue neutral." It seeks to create a simpler tax code that will raise only as much revenue as currently.

But America faces massive challenges. For all the railing about the long-term deficit projections (almost completely due to the excessive costs of our broken health care system), a far more pressing challenge is our growing public investment deficit. We aren't doing even the minimum to modernize our infrastructure -- from roads and mass transit to sewers and clean water. We aren't providing the basics in education -- from pre-school to advanced training to affordable college. We are cutting research and development, when we should be expanding it if we hope to succeed as a higher wage economy. Social Security needs to be expanded, not cut back. These aren't luxuries; they are vital to a civilized and competitive country. Yet, current budgets project even deeper cuts in domestic spending across the board to levels not seen since the 1950s. At a time of public squalor and extremely unequal private wealth, tax reform should generate more revenue.

2. Corporations should share in meeting America's challenges

For corporations, shared sacrifice is for suckers. Camp's corporate reforms -- lowering rates from 35 percent to 25 percent and closing loopholes -- are designed to be "revenue neutral." American corporations face the "highest corporate tax rate in the industrialized world," he argues, and lowering them would make America more "competitive."

In reality, as a new report from Citizens for Tax Justice shows, "most profitable U.S multinational corporations actually pay higher effective tax rates in the foreign countries where they do business than they pay here in the U.S." Looking at the last five years, profitable Fortune 500 companies paid a rate of 19.4 percent on their profits, with a third paying less than 10 percent, and companies like General Electric, Verizon, Boeing and others paying no U.S. income taxes at all over the five-year period. And corporations contribute a lower percentage of federal revenue in the US than corporations in other industrial nations.

In the name of "shared sacrifice," Washington has cut food stamps, Head Start, home heating for the elderly, aid to education, Medicare, and pushed for cuts in Social Security. Yet somehow corporations shouldn't pay a penny more. "Revenue neutral" corporate tax reform is a scandal, not a solution.

3. The tax code should be steeper, not flatter

Republicans like Camp vamp about a tax code that is "10 times the size of the Bible with none of the good news." They champion in a simpler, flatter tax code, that will make doing taxes easy. Everyone likes the idea of a simpler tax code (until they see what tax exemptions are eliminated). But simpler and flatter are not synonyms.

We need a tax code that is simpler and steeper, not flatter. That is, one that raises taxes on the wealthy, while eliminating complex tax dodges and loopholes that almost entirely benefit the wealthy and big corporations. The Republican promise has been to move to two tax rates -- 25 percent and 10 percent. Camp, struggling to pay for this, adds a third at 35 percent for income earners over $400,000.

But while inequality has grown between the 1 percent and the rest of us, the true extremes have come in the soaring wealth and wages of the very rich -- the millionaires and billionaires that capture more and more of the nation's income. Any sensible tax reform would require the super wealthy to pay more in taxes. The Congressional Progressive Caucus budget, adopting a proposal made by Senator Bernie Sanders and Rep. Jan Schakowsky, would levy progressively higher rates on those earning over a million a year.

Camp and others assert that lower rates will mean greater growth, but this is supported by faith, not by evidence. The rich are pocketing a record portion of the nation's income. Corporate profits are near record highs as a portion of the economy, while workers wages are at record lows. Yet the economy isn't growing faster. We'd do much better to tax the money that corporations stash abroad and use it to rebuild the country than to lower top-end tax rates.

4. Income should be taxed at the same rate whether earned by a worker or an investor.

In today's tax code, workers pay a higher rate of taxes on their wages than investors do on the income from their investments. The lower rate on capital gains and dividends is an enormous gift to the wealthy, for most Americans get their income from work, not from wealth. This tax break is a good part of why Mitt Romney can end up with a tax rate that is lower than his secretary. It is also what helps to keep accountants and tax attorneys employed, inventing new ways to paint earnings as investment income rather than salary. Camp's "simpler, flatter" tax reform protects the dodge, excluding 40 percent of investment income from taxes altogether. With that glaring loophole, comprehensive tax reform is neither comprehensive nor reform.

5. The solution to the Cayman Island and other tax havens isn't to make the world a tax haven

Multinationals now stash an estimated $2 trillion abroad to avoid paying taxes. They can defer taxes on profits earned or reported abroad until they return the money to the US. This is a massive incentive to ship jobs and move profits abroad.

The Republican plan proposes to end the egregious abuse of tax havens essentially by making the entire world a tax dodge with what is called a "territorial" tax system. Most US corporate profits that are reported offshore will be taxed at a nominal 1.25 percent tax rate, while small businesses will pay a 25 percent tax rate on earnings here at home. This doesn't shut down the tax dodge; it globalizes it. And it adds to the incentive to move jobs abroad.

Pulling Back the Curtain

Camp's proposal is like Toto pulling the back the curtain that exposes the Wizard of Oz. He's put forth a proposal that shows what it would take to lower rates and sustain revenues. He's included some progressive ideas -- like the bank tax -- as well as reactionary ones -- like his giveaways to multinationals stashing profits abroad and investors clipping coupons at home. It doesn't raise the revenues we need. It doesn't make the tax code more progressive or much fairer. But it stripped the curtain away from the Republican promise and revealed a simple truth: Republicans were never serious about the centerpiece of their own agenda