EDITORIAL: A step toward reform

For once, partisans of both parties agree on tax changes

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Nearly everybody agrees that the tax system is broken. Jimmy Carter famously said it was “a disgrace to the human race,” and for once Mr. Carter spoke for just about everybody. But every line of the tax code has a fierce champion. Introducing a reform plan is a guaranteed way to make enemies.

Rep. Dave Camp, the Michigan Republican charged with oversight of the Internal Revenue Service, had the courage Wednesday to introduce a plan to make Tax Day less obnoxious. There’s much to like.

The draft consolidates the current multiplicity of personal tax rates — 10, 15, 25, 28, 33, 35 and 39.6 percent — into a 10, 25 and a special 35 percent rate. The latter applies as a surtax for married couples making more than $450,000. The arrangement is not the single rate that would be ideal, but it’s significant progress nonetheless.

The figures weren’t chosen at random. Mr. Camp worked with Democrats and well as Republicans, solicited opinions from members of the House and Senate, and did his homework. He came up with something that might make it to President Obama’s desk.

Reducing the corporate rate to 25 percent over five years, so that it is no longer the highest in the industrialized world, seems to be one of the plan’s best features. Even Mr. Obama has expressed support for the concept. The leadership of the RATE Coalition, a business group that has been pushing for corporate tax reform, congratulates him and thanks him for delivering on his commitment to simplification, base-broadening and reform on the corporate side.

Yet an analysis by Cornerstone Macro suggests the “pay fors” used to reduce the rate will adversely affect capital-intensive industries to favor businesses like those in the retail sector. Successful small businesses that pay taxes on the personal side of the ledger, the backbone of the U.S. economy, would still pay a higher tax rate thanks to the 3.8 percent Obamacare surtax. In certain cases these firms could realize enough income annually to trigger Mr. Camp’s new surtax, putting their actual rate somewhere north of 38 percent.

These complaints shouldn’t distract from the positives. A perfect plan based on sound economic theory would be dead on arrival. Tax bills must have class envy provisions, or they won’t get past Harry Reid’s Senate, much less Mr. Obama’s desk. The biggest hurdle even with Mr. Camp’s compromise is that easily intimidated members of both parties are wary of going on the record with a vote to eliminate the broadly popular deduction for state and local taxes and to cap the deduction for new mortgages at $500,000. Yet such deductions must fall for the rates to lower.

Rather than see this as an exercise in futility, the proponents of a fair, flat tax code should be encouraged. The ancient Chinese maxim reminds us that a journey of a thousand miles begins with a single step. The largely successful Reagan-era tax reforms started in the late ‘70s with initiatives like the original proposal of the late Jack Kemp that most assume had only a small chance of becoming law.

The current tax structure is a serious obstacle to economic growth and prosperity. Realistic plans must be proposed to have any chance of clearing that obstacle. With the House taking the first step, we’re a little closer to rescuing the economy.

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