UPDATE 2-U.S. Republican offers ambitious, but stillborn, tax overhaul

Wed Feb 26, 2014 6:41pm EST

* Rep. Dave Camp unveils tax plan to pessimistic response

* Plan includes bold changes in tax rates, deductions

* Congress deeply split on fiscal policy

By Kevin Drawbaugh

WASHINGTON, Feb 26 (Reuters) - The top tax law writer in the U.S. House of Representatives released a plan to overhaul the tax code on Wednesday, but it was widely seen as dead-on-arrival in a Congress still deeply divided over fiscal policy.

Michigan's Dave Camp, the Republican chairman of the powerful House Ways and Means Committee, called for simplifying the tax code by trimming both tax rates and many widely used provisions that reduce taxable income.

Reaction was largely negative, with lobbyists blasting the plan in defense of their narrow interests, and analysts saying its practical impact would likely be negligible, although it could serve as a model for further debate.

Republican Speaker of the House John Boehner, of Ohio, stopped well short of endorsing it, saying it was only the start of a long "conversation ... It's just an outline, a discussion draft."

Guggenheim Partners policy analyst Chris Krueger said Camp deserved "an A+ for effort and public policy moxie ... but closer to a D- on timing and politics."

He said Camp's plan will expose Republicans to Democratic mid-term election campaign attacks and "will likely never see the House Floor, let alone consideration before the Senate."

The 979-page discussion draft was extremely detailed and called for a number of bold steps, including:

- Reducing the number of tax brackets to three from seven, with tax rates of 10, 25 and 35 percent;

- Increasing most taxpayers' standard deductions and child tax credits, but eliminating personal exemptions;

- Taxing long-term capital gains and dividends as ordinary income, but exempting 40 percent of that income from any tax;

- Repealing the alternative minimum tax for individuals and businesses;

- Cutting the top corporate income tax rate to 25 percent from 35 percent;

- Cutting the cap on the mortgage interest deduction to $500,000 from $1 million;

- Repealing tax breaks for college tuition and college loan interest, clean energy investments, medical expenses, tax preparation expenses, moving expenses and other items; and

- Making numerous changes to the charitable contribution deduction.

'CARRIED INTEREST' TARGETED

Camp said his plan would "clean up" the carried interest provision that lets private equity partners and other financial interests pay lower taxes on large portions of their incomes.

He also said his plan would end a depreciation provision in the tax code that favors private jet owners. That provision and the carried interest loophole have both been targeted in the past by President Barack Obama.

The Camp plan also includes a tax on banks resembling one that Obama once proposed for financial institutions with assets exceeding $50 billion.

White House spokesman Josh Earnest told reporters that Camp's proposal was a "positive development." Earnest said the White House was encouraged by proposals to close the corporate jet and carried interest loopholes. But he also said that the White House had concerns about the plan. "Congressman Camp's proposal appears to actually add to the long-run deficit."

MUNI BOND CONCERNS

Reflecting the response of a wide range of special interest groups, the Bond Dealers of America said it was "concerned" about Camp's idea for a 10-percent surtax on high incomes that "could negatively impact municipal bonds."

The tax code has not been thoroughly overhauled in 27 years despite complaints about its complexity and its many loopholes.

There is little prospect of reform in 2014, U.S. Senate Republican leader Mitch McConnell of Kentucky said on Tuesday.

"I have no hope for that happening this year," he told reporters at the U.S. Capitol, blaming lawmakers' stubborn fiscal gridlock on Democrats seeking tax increases.

One of the main obstacles to reform is the abundance of tax breaks in the code that benefit corporations and individuals, lowering the effective tax rates of both and giving them ample reason to resist tax changes that would harm their interests.

Nine banking and financial industry lobbying groups issued a joint statement on Camp's plan "opposing the new lending tax on financial institutions."

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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