Revenue Impacts of Camp's Tax Reform Proposal
Earlier today, House Ways and Means Chairman Dave Camp (R-MI) released the Tax Reform Act of 2014, which would drastically restructure the U.S. tax code. We took an initial look at the draft and will follow-up with an in-depth paper later this week. Camp has stated that his goal for reform was to close loopholes and lower rates, not to raise revenue. The chart below shows the trajectory of the new proposal in comparison to current law and current policy.
The Joint Committee on Taxation estimates that the proposal would be roughly budget neutral over the 10 year window, but add to the deficit in 2023. Notably, the discussion draft generates some revenue from timing shifts and temporary revenue provisions to offset permanent tax rate reductions, which raises concerns that it will add to the debt over the long-term.
Notes: hypothetical revenue with dynamic scoring assumes $375 billion of additional revenue (the mid-point of JCT’s estimates) distributed from 2015 through 2023. Revenue levels compared to pre-reform GDP. Current law with expiring provisions assumes the exclusion the extension of the normal tax extenders and expiring refundable tax credits. Net revenue refers to revenue minus refundable credits.
The graph above also illustrates what revenues would be if a host of temporary tax provisions set to expire were extended permanently without offsets. Compared to that possibility, Camp's draft reform would actually generate approximately $560 billion of new revenue over 10 years.
The Joint Committee on Taxation additionally provided a dynamic score of the draft. The dynamic score considers projected economic growth anticipated as a result of this reform, which JCT says could increase revenue over 10 years by between $50 and $700 billion (for the above graph, we show the central estimate of $375 billion). JCT explains their assumptions:
“The extent of both supply and demand effects depends on the sensitivity of individual labor choices to changing effective marginal rates, the responsiveness of individual savings choices to changes in the after-tax return on earnings from investment, and the responsiveness of businesses to changing incentives for overall investment and the location of investment and taxable profits in the United States. In addition, the projected impacts of the proposal on the economy depend on assumptions about the monetary policy response by the Federal Reserve Board. In general, under most modeling assumptions, the proposal is projected to increase overall economic activity as measured by changes in gross domestic product (“GDP”) relative to the present law baseline over the 10-year budget period.”
We're encouraged that Chairman Camp's draft relies on conventional scoring and the current law baseline to achieve his fiscal goals. However, it can be useful to consider a proposal's dynamic effects and how it compares to current policy.