A new report detailing the economic effects of House Ways and Means Committee Chairman David Camp’s tax reform discussion draft was released this morning by the nonpartisan Tax Foundation. According to the report, the plan would slightly increase the level of GDP, raise taxes on capital, and modestly decrease the capital stock. However, marginal changes could improve the plan significantly.

Key findings

• The domestic provisions of Camp’s income tax reform would raise the level of GDP very slightly over the long term by about 0.2 percent compared to current law, consistent with the lower end of the Joint Tax Committee’s estimates for the proposal.
• The improvement in GDP is dependent on a partial inflation adjustment of the depreciation schedules for equipment in the Camp draft. Without the adjustment, we find that the Camp plan would reduce GDP relative to current law by about 0.4 percent.
• The income tax reform plan would reduce labor productivity and total pre-tax income. However, the after-tax wage would rise due to personal tax rate reductions, encouraging more labor force participation.
• Reduced labor costs and higher after-tax wages should increase hours worked, equivalent to adding about 486,000 full-time jobs, but people would be working longer but producing less total output with less capital.
• If the reform plan had retained the current depreciation regime (MACRS), it would generate 6 times the growth and 40 percent more jobs and produce a small revenue gain after economic growth. If it had retained MACRS and allowed a 50 percent exclusion of capital gains and dividends, instead of the 40 percent exclusion in the plan, it would generate 12 times the growth and nearly twice the additional jobs and would result in a significant revenue gain in the long term.
• A more fundamental reform—such as replacing the income taxes with a personal expenditure tax or other “saving-consumption neutral” tax system—could raise GDP by 12 percent to 15 percent and could either return larger revenue to the government for deficit reduction or remain revenue neutral on a dynamic basis to maximize the growth effect. 

Three positive takeaways from Chairman Camp’s effort:

• The Committee directed the JCT to conduct a dynamic analysis of the economic consequences of the final package. This is an important step in any serious tax work, and it gave the Committee some leeway in crafting a better plan.
• The Committee was clearly determined to correct the worst features of the current U.S. worldwide tax system and fully recognized the burden that system imposes on businesses trying to compete in the global economy.
• The Committee recognized the value of reduced tax rates, particularly in the corporate sector. Here, too, they demonstrated the importance of cutting rates to enable U.S. businesses to compete in the world.

“The Committee’s improvements in these areas are undercut by hewing to static revenue targets and limiting its reform options to remain within the narrow confines of the income tax,” said Steve Entin, Senior Fellow at the Tax Foundation. “However, the Committee could build on the many good features of the proposal by adjusting its approach to capital cost recovery and the taxation of saving.”

“They would discover that a bolder reform, with lower tax rates on saving and capital formation, would generate stronger growth and higher incomes for the public at no net revenue cost to the government. That sort of reform would raise incomes and employment by many times that of the current plan,” added Entin.