The long-awaited House GOP tax reform blueprint is a revenue neutral plan to boost the economy, but more details are needed before it can be dynamically scored and a full distributional analysis done, House Ways and Means Committee Chair Kevin Brady, R-Texas, said at a June 24 briefing after the public release.
"There's no [dynamic] score at this point because we have not finished the blueprint," Brady told reporters, emphasizing that the scoring is necessary because there are "real impacts" from lowering tax rates and encouraging savings.
The tax blueprint is the last of six policy planks requested by House Speaker Paul D. Ryan, R-Wis., to be released before the Republican National Convention in July. Ryan created the six task forces earlier in the year, with Brady leading the tax task force.
Over the past few months, Brady held meetings to open the policy decision-making to the broader House Republican group. He has also been claiming that the released product will offer pro-growth ideas.
The blueprint uses the Congressional Budget Office's policy baseline, which assumes that all current tax policy will be permanently extended. By doing so, lawmakers say at least $400 billion of the plan's cost over 10 years will be offset by eliminating most of the deductions and credits in last year's tax extenders package (P.L. 114-113).
Trump and 2016
For the rest of 2016, Republican lawmakers will be working with different business sectors to fine-tune the proposals that could be translated into legislation, Brady said.
They will also be melding the tax plan with tax elements from the healthcare and anti-poverty blueprints, which are two more of the six election-driven policy planks, Brady continued.
The House's top taxwriter also acknowledged that the House Republicans' tax policy vision will align with that of Donald Trump, the Republican party's presumptive presidential nominee.
"We think our presidential nominee strongly supports pro-growth tax reform [and] strongly supports a simplified tax code," Brady said. "I'm hopeful as he looks at the policy blueprint that it fits where he takes this country."
But Ways and Means Committee member Devin Nunes, R-Calif., whose American Business Competitiveness Act (H.R. 4377) influenced the blueprint's design, insisted that the presidential nominee had not been involved in developing the plan. "Do you think Donald Trump was controlling our minds somehow?" Nunes quipped.
Business Growth Incentives
At the briefing, House Republican taxwriters insisted that their plan offers parity for the various types of businesses, with a 25 percent rate for small business and passthrough income and a 20 percent rate for C corporation income.
Double taxation on corporations' paid dividends accounts for their lower rate under the plan, Nunes said.
"It's not based on small or large. It's based on how you're legally set up. I could be a one-man C-corp and get a 20 percent rate," Nunes said. "Because of the double taxation on C-corp is why it's necessary to have a little lower rate than the individual. But any company can create an LLC or C-corp no matter what size you are." The blueprint labels the two rates as applying to "small businesses" and "large businesses," respectively.
Brady emphasized that the GOP plan's rate for small businesses is a dramatic drop from the current tax structure.
"Don't let that myth continue. You know right now that our passthroughs are paying the top rate of 44.6 percent as individuals, not just 39.6 percent. That's the dramatic cut to 25 percent," Brady said.
Under the plan, business owners would also have the opportunity to choose how they structure their entities, according to Rep. Mike Kelly, R-Pa., a car dealership owner.
"You can make those options. When you are in business, you are building a business strategy to compete in the field that you are in. Things change. You have to pivot," Kelly said.
In separate interviews, Ways and Means Committee members highlighted some of the so-called growth provisions, such as the full expensing of business costs and the consumption taxes.
Rep. Kenny Marchant, R-Texas, said one of the most growth-oriented provisions in the plan is allowing 100 percent business expensing, which he said would stimulate both quick and sustained economic growth. He estimated that full expensing of business costs would create a trillion-dollar hole in tax revenues, but that two-thirds of that revenue loss would be offset by the border-adjustable consumption tax and the removal of current deductions for net business interest expenses.
Nunes said the GOP plan would replace most of the business tax preferences in the code, which he characterized as "bad policy" that developed over time. He said that by going to a cash flow system -- effectively a consumption tax -- and by allowing full expensing, taxpayers wouldn't need all those credits and deductions.
The blueprint asserts that capital formation and investment are keys to a growing economy, but it leaves some questions, especially in how the policy would affect real estate investment, according to Jeffrey DeBoer of the Real Estate Roundtable.
"What would it mean for new construction where the initial expense is the acquisition of a development site? How would tax recapture rules work upon disposition of a property? What does the Blueprint mean when it refers to special interest expense rules for companies engaged in leasing? What effect will this new system have on property values and market liquidity during the transition from one set of rules to another?" DeBoer asked in a statement.
DeBoer acknowledged that the blueprint is the "beginning of a longer conversation, and [we] look forward to examining these and other issues with the Committee."
Other observers also pointed out that the blueprint's treatment of cross-border sales, services, and intangibles could violate trade agreements.
"The concept of border adjustability has been discussed before, including in President [George W.] Bush's 2005 Growth and Investment Tax Plan," a tax lobbyist said. "Because there is a lack of specificity in the plan it is not entirely clear, but it looks like the blueprint could impose a 20 percent tax on a much higher domestic income tax base than the current system unless the cost of production occurs in the United States."
The top Democratic taxwriters in the House and Senate argued that the Republicans' new plan largely benefits wealthy taxpayers.
"The House GOP's framework goes in the opposite direction, allowing the privileged few to push what they rightfully owe onto the backs of middle class families," Senate Finance Committee member Ron Wyden, D-Ore., said in a June 24 release shortly after the blueprint was made public.
The plan also rewards the "privileged few by cutting tax rates on capital gains and dividends, repealing the estate tax, expanding ways for the elite to save tax-free, and greatly expanding incentives for companies to ship jobs overseas," a Wyden spokesperson later told Tax Analysts.
House Ways and Means Committee ranking minority member Sander M. Levin, D-Mich., pointed out in a statement that the "50 percent deduction for an expanded definition of investment income" is a "huge tax cut on capital gains, dividends, and interest income -- effectively lowering the top rate on this income to 16.5 percent."
The lawmaker took issue with several ideas in the Republican blueprint, including repealing the estate tax, which he said would "provide a $269 billion tax cut to the wealthiest 5,500 estates in this country."
"Less than 0.15 percent of Americans owe any estate tax under the current system, and repeal of the estate tax would represent an average $4 million tax cut to the wealthiest Americans," Levin continued.
Levin also pointed out that the Republicans' destination-basis tax system resembles a key feature of a VAT because it would be "achieved by providing for border adjustments exempting exports and taxing imports."
A 'Service First' IRS
The GOP's tax reform plan includes a radical restructuring of the IRS, which would be "streamlined" to focus on "customer service," according to the document.
The revamped tax collection agency would be organized into three major units: a "families and individuals" unit dedicated to answering taxpayer questions; a "business" unit with specialists on tax issues facing entrepreneurs, small and large businesses, and U.S.-based global corporations; and an independent "small claims court" unit for quick resolution of tax disputes.
The IRS's commitment would be to a "Service First" philosophy, the GOP blueprint pledged. Each of the new business units "will have access to a modern taxpayer records system and internal communications that are secure and comply with record-retention requirements," the document says.
The new IRS would be headed by a presidentially appointed and Senate-confirmed "administrator" with a three-year term limit, the GOP proposed. The president could reappoint the IRS administrator only once, to "ensure new management perspectives and prevent entrenchment of bureaucrats."
The GOP blueprint also proposes eliminating the Internal Revenue Service Oversight Board, redirecting its resources to customer service.
The GOP's tax administration reform plan does not include any dollar estimates of what a reformed IRS would cost.
William Hoffman contributed to this article.
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