U.S. Representative David Camp (R, Michigan), Chair of the House Committee on Ways and Means, has just introduced the “Tax Reform Act of 2014” and describes it in a column in yesterday’s Wall Street Journal, “How to Fix Our Appalling Tax Code”. This legislation, developed over the past three years by the committee he chairs, has lots of attractive features. Mainly, however, it would give the economy a substantial boost. Congress’s Joint Committee on Taxation estimates that it would increase GDP by $3.4 trillion over the next ten years and create 1.8 million new jobs. It will accomplish this goal by trimming or eliminating tax breaks and loopholes for the wealthy in order to reduce tax rates for almost everyone. For example, the home mortgage deduction will be cut, for new homeowners, from the current value of $1,000,000 to $500,000. The deduction for state and local taxes will be eliminated. The charitable deduction will only apply for contributions in excess of 2% of income. The middle class is protected by raising the standard deduction to $11,000 per individual or $22,000 per couple. This means that 95% of taxpayers will be able to avoid itemizing.
The two basic tax rates would be 10% up to $75,000 in income, then 25% up to $400,000. Over $400,000 there would be a 10% surcharge on salaried or “non-production” income. The corporate tax rate would be cut from 35% to 25%, again by eliminating special exemptions and loopholes.
All of these features add up to a dramatic simplification of our tax code which will save an estimated $168 billion annually in preparation fees.
But always keep in mind the larger purpose of broad based tax reform like this. In the words of the economist Glenn Hubbard, it is “a policy shift in favor of mass prosperity – dynamism and inclusion.” It will do more for the poor than raising the minimum wage because it will actually create new jobs and better paying jobs.
This legislation represents a fantastic starting point for a national discussion on pro-growth tax reform. Let’s get on with it!
On June 18, 2013, Lawrence Mead, Department of Politics and Public Policy, New York University, testified before Congress, “Making Welfare Work”, that even as the number of Americans receiving welfare has dramatically increased in recent years, welfare programs are failing to provide sufficiently strong incentives for the recipients to find work. This has contributed to the fact that “the share of our population that is employed has recently fallen sharply compared to several European countries” such as Germany, the Netherlands and the United Kingdom.
Mr. Mead shows that there are three main reasons for this: “(1) work tests in the major income programs are still limited, (2) we have neglected the problem of poor men, and (3) the disability programs are diverting too many Americans from the work force entirely”. He points out that the Welfare Reform Act of 1996 required that the Temporary Assistance for Needy Families (TANF) program put 50% of their cases in rigorous “work activities” by 2002. This led to a dramatic reduction of the AFDC/TANF rolls by more than two-thirds. But since then exemptions and waivers have sharply limited the specific work activity demands which mobilized welfare recipients to hold jobs.
Even with the currently high unemployment rate, there are plenty of low-paid, low-skilled jobs available, which are suitable for welfare recipients. After all, even a low-paid job may well provide the opportunity to learn skills as well as to develop better work habits. Congress clearly needs to strengthen work requirements for welfare. And the incentives need to be right so that these workers keep more pay than they give up in benefits.
Putting more welfare recipients back to work will not only help control the federal budget but also give our economy a boost by increasing the size of the workforce!