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U.S. House GOP Tax Plan Would Lower Individual, Corporate Rates

Posted on June 24, 2016 by Cooper, Stephen K.Lucero, Kat

House Republicans on June 23 previewed an ambitious tax reform plan that they believe will transform U.S. individual, corporate, and international tax systems and boost the growth rate of U.S. businesses beyond their closest international competitors.

The House Republican tax reform blueprint, previewed at a press briefing by senior GOP leadership aides, would lower the corporate tax rate to 20 percent, reduce the number of individual tax brackets to three, allow 100 percent business expensing, and eliminate the deductibility of interest for businesses. There would also be a 50 percent deduction for capital gains, while the estate and alternative minimum taxes would be completely repealed. 

Other ideas in the blueprint include simplifying the tax code enough so that Americans can file postcard-sized returns and reducing individual tax rates to 12, 25, and 33 percent. Small businesses organized as S corporations, partnerships, and sole proprietorships would pay a top tax rate of 25 percent on their active business income -- but just what constitutes that income would be determined by lawmakers as the plan becomes legislation.

The plan would retain some of the tax code's popular individual tax preferences, such as the earned income tax credit, the mortgage interest deduction, and the deduction for charitable giving. Retirement savings plans such as 401(k) plans and IRAs also would be preserved. Other tax benefits for education, families, and children would be consolidated, while the standard deduction would be raised to $24,000 for a married couple and $12,000 for a single adult.

The rates for corporate taxpayers would be cut from 35 percent to 20 percent, but as part of moving to a consumption or cash flow base, those taxpayers would not be able to claim a deduction for current year net interest expenses. Most business credits would be removed from the code -- except for the research credit -- but businesses would be allowed 100 percent business expensing.

On the international tax side, the United States would move to a territorial system and destination-based consumption tax. According to a recording of the press briefing, aides said that system would eliminate concerns over transfer pricing and base erosion.

"House Republicans are attempting to move away from the concept of accrued income, in particular the double taxation on saving and investment income, and towards consumption as a tax base," an aide said.

The tax reform blueprint is the last of six campaign planks developed by House Speaker Paul D. Ryan, R-Wis., and Republican lawmakers, who see tax reform as the guiding principle of pro-growth economic policies. Republicans plan to develop the tax reform plan during the first half of 2017 and then produce legislation by year-end. Other campaign planks include a healthcare plan that would repeal and replace the Affordable Care Act's taxes with a cap on the tax exclusion for employer-based coverage and offer a universal tax credit to purchase insurance. 

The tax plan is intended to build on the tax reform legislation drafted by former House Ways and Means Committee Chair Dave Camp but with different definitions of distributional and revenue neutrality. Ryan's tax reform plans would not raise the average income tax rate of any taxpayer, no matter the taxpayer's income level, one aide said. "There will be no tax increase on middle-income people to pay for a tax cut on millionaires. That will not happen," the aide said.

Also, GOP lawmakers believe that congressional revenue estimators will be using dynamic scoring to show that economic growth from their policies will raise "hundreds of millions of dollars" to offset any potential revenue losses from lower rates, aides said.

Ways and Means Committee Chair Kevin Brady, R-Texas, touted the plan's design, which he said would boost economic growth and make the tax code fairer. He also argued that the blueprint would redesign the IRS into an agency that delivers excellent customer service.

"The blueprint is the beginning of our conversation with the American people, and we look forward to hearing their ideas," Brady said in a statement.

Next Steps

The next step for the task force is to build a broader consensus for the tax reform blueprint among House Republicans and gather feedback from the rest of the business community and individual taxpayers, according to Ways and Means members who spoke to Tax Analysts on June 21 ahead of the blueprint's release.

"Collecting all the feedback -- that's going to be our next challenge," said Rep. David G. Reichert, R-Wash. "Evaluating that and then applying it again and working toward January for the next president."

Rep. Charles W. Boustany Jr., R-La., said he hopes to get a strong consensus from House Republicans once the plan is introduced. "We want everybody to run on this. Hopefully this is the Republican plan for tax [policy]," the chair of the Ways and Means Tax Policy Subcommittee said.

Boustany said the blueprint is "definitely" a pathway toward international tax reform, an effort that he was eager a few months ago to pursue for this year but was sidelined largely due to the election schedule and the shift of priority toward the tax blueprint.

However, the lawmaker was hesitant to say if he will continue work on international tax reform after the blueprint's release. "We're running out of time. We'll see," Boustany said.

And because major tax reform will not happen this year, Boustany said, he may not act on his innovation box proposal until Congress starts to work on overhauling the tax code.

"Innovation box is necessary if we can't lower the corporate tax rates. And so we have to see where we end up," Boustany said of his bipartisan proposal to lower the tax rate for income derived from intellectual property, which he released last year as a discussion draft with fellow taxwriter Richard E. Neal, D-Mass.

"If we can't lower the corporate [rate] low enough, I will offer it and push it," Boustany said. 

Not in the Blueprint: Carried Interest

One area not explicitly addressed in the blueprint is the taxation of carried interest, which many Democrats have pointed to as an example of a loophole that should be closed in tax reform efforts. Speaking June 23 at a press conference alongside the group Patriotic Millionaires, Ways and Means ranking minority member Sander M. Levin, D-Mich., said that House Republicans are unlikely to embrace the issue.

"My guess is carried interest won't be in it," Levin said of the tax reform blueprint ahead of its release. "We grabbed ahold of an issue that so illustrates what tax reform should be all about."

Last year, Levin introduced the Carried Interest Fairness Act of 2015 (H.R. 2889), which would treat compensation received by investment fund managers as ordinary income, subjecting it to employment taxes and taxing it at ordinary income rates instead of the lower capital gains rate.

Sen. Tammy Baldwin, D-Wis., who introduced a companion measure in the Senate (S. 1686), said that the Joint Committee on Taxation estimated that the legislation would generate $15 billion over 10 years.

"That is $15 billion that we could invest in . . . working Americans and small businesses, which will lead to greater economic growth and raise the living standards of the middle class and working families," Baldwin said at the press conference. 

Follow Stephen K. Cooper (@scoop1200) and Kat Lucero (@kat_lucero) on Twitter for real-time updates.