Tax Analysts Blog

25 Interesting Features of Camp’s New Tax Reform Plan

Posted on Mar 3, 2014

Writers tasked with summarizing complicated matters always face the dilemma of either oversimplifying the subject or overwhelming the audience. To be done right, some things take time -- like roasting a duck or exploring the Louvre or learning Italian. But the modern information marketplace has heightened readers’ expectations. Executive summaries aren’t just for executives anymore. So here is my one-paragraph summary of Ways and Means Committee Chair Dave Camp’s 979-page overhaul of the U.S. tax system that tries to balance comprehensiveness with comprehensibility:

    The Camp draft is a revenue-neutral, distributionally neutral, Reagan-style reform that sets individual tax rates at 10, 25, and 35 percent. The corporate rate declines from 35 percent to 25 percent over five years. The universally despised alternative minimum tax is finally put to rest. In a landmark change, foreign profits are generally exempt from U.S. tax, but significant anti-base-erosion rules are included, such as a minimum tax on foreign profits. To pay for rate cuts, hundreds of tax breaks are trimmed or outright repealed. On the individual side, the largest of those are cuts to deductions for mortgage interest (no borrowing over $500,000), for charitable contributions (must exceed 2 percent of income), and for state and local taxes (repealed entirely). On the corporate side, depreciation is slowed down (this is huge), and the last-in, first-out method of accounting and special deduction for manufacturing are repealed. The big, bold new revenue raisers are an excise tax on the largest banks and slowed cost recovery for research and development and for advertising. A bill like this has little chance of becoming law before 2017.
With that out of the way, here’s a list of 25 of the more intriguing aspect of the plan.

    Taxing misfortune. The deductions for medical expenses in excess of 10 percent of income and for casualty losses are repealed.
    Not easy being green. All the complicated tax benefits for alternative energy are repealed.
    Oil and gas. The fossil fuel industry also faces large tax increases with the repeal of LIFO, accelerated depreciation, and percentage depletion. But the tax break for intangible drilling costs is retained.
    Get real. Many corporations with large real estate holdings have been successful in converting themselves entirely or spinning off subsidiaries into tax-free real estate investment trusts. No more under this plan.
    Lawyers, doctors, and CPAs take a hit. Big and midsize professional firms would face a major tax increase because they would no longer be allowed to use the cash method of accounting.
    Capital gains and dividends. The top rate under current law: 23.8 percent. The top rate under the proposal: 24.8 percent.
    Professional sports. The front office of the NFL is a tax-exempt organization on the theory that it is like a trade association for the league’s 32 teams. In the draft, the NHL and the PGA are similarly tax exempt (but not the NBA and Major League Baseball). The draft repeals the tax-exempt status for professional sports leagues.
    Brake on flipping houses. For simplicity’s sake, the law excludes from taxable income most capital gains realized on sales of a principal residence. The Camp draft adds new restrictions, such as allowing the exclusion to be used only once every five years.
    Employer-provided health insurance. High-income employees will have the health insurance they get at work taxed at 10 percent. Republicans who want to replace Obamacare were expected to use this money in their healthcare reform bill.
    Municipal bonds. High-income taxpayers must pay a surtax of 10 percent on their otherwise tax-exempt municipal bond interest. That will significantly increase borrowing costs for state and local governments -- an extra whammy for subfederal governments on top of the repeal of the deduction for state and local tax.
    Pension benefits cut. Retirement plan contributions of high-income individuals are also subject to the 10 percent surtax.
    The opposite of simplification. Distinguishing expenditures for research and advertising, which must be amortized under the proposal, from ordinary business expenses will greatly increase administrative costs for the IRS and compliance costs for businesses.
    Defining qualified research. The good news for business is the credit is made permanent and simplified. Whether software and supplies used in research are eligible for the credit has been the subject of much dispute between the IRS and tax managers. The Camp bill ends the argument by disqualifying all these expenses from eligibility for the credit.
    Violent video games. Several press reports cited a Ways and Means summary (p. 24) of the bill stating that tax credits would no longer be available for the development of violent games like Bulletstorm, Dead Island Riptide, and Shadows of the Damned. This is not a targeted provision, but just part of the new general prohibition on research for software development.
    Meals and entertainment: Currently, these expenses are 50 percent deductible. Under the Camp draft, only a partial deduction for business meals would remain.
    Annoying Wall Street. In addition to the new special tax on the largest financial institutions, derivatives marked to market at year-end and taxed as ordinary income, and fees earned by fund managers, will be taxed as ordinary income instead of capital gains.
    Insurance companies. Major tax increase.
    New approach to block profit shifting. As part of international tax reform, there have been several proposals to prevent profits from intellectual property ending up in tax havens. These anti-base-erosion rules usually require identification of specific intangible assets and then tracing the profits generated by them. The draft takes an entirely new approach. Most income exceeding 10 percent of the value of plant and equipment would be considered intangible profits subject to a new minimum tax.
    Transition tax. The much cited $2 trillion of previously earned offshore earnings will be taxed at 3.5 percent if now invested in bricks and mortar and at 8.75 percent if currently in cash and cash equivalents.
    Infrastructure spending. The $127 billion raised from the transition tax is earmarked for the Highway Trust Fund.
    Not in the draft. Limit on corporate interest deductions. Repeal of the tax exemption for credit unions. Repeal of the low-income housing credit.
    Not so dynamic. Camp and other conservatives make a big deal out of the increase in economic growth from the bill that was estimated by the Joint Committee on Taxation. There are important economic benefits from enacting tax reform, but Camp & Co. overstate them by only talking about the highest (and least defensible) of the JCT estimates and also by comparing estimated 10-year benefits with annual economic aggregates.
    Biggest question. Will the bill be revenue neutral after 10 years? Probably not. That’s because most of the revenue raisers are timing benefits that gradually fade (though this will be offset by smaller inflation adjustments that will more quickly push individuals into higher tax brackets over time).
    Biggest disappointment. Camp and fellow House Republicans all but promised to reduce the top rate to 25 percent. They failed.
    Biggest benefit. Massive simplification for regular people. The number of individuals required to itemize will be reduced by 80 percent.

Read Comments (3)

amt buffMar 3, 2014

The current system hides its actual effective rates, which are quite a bit
higher than the headline rates. It is therefore not possible to achieve revenue
neutrality in an honest and simple income tax system without INCREASING the
headline rates.

Camp has demonstrated by example that the price of lower headline rates is
higher trickery with even more rate kickers and denial of legitimate
adjustments.

Republicans need to get over their obsession with reducing the headline tax
rates and focus on actual tax rates.

chris berginMar 3, 2014

Yes, AMT buff, and Democrats need to get over their obsession with spending our
children's money. All things in moderation is a valuable lesson for both
parties.

Michael KarlinMar 6, 2014

Can anyone explain to me the policy reason for the difference in the following
two situations? (In the examples below, x is 2 under current law and 5 under
Camp.)

Spouses A and B buy a house for $100,000 and sells it 2x years later for
$1,000,000. They pay tax on $400,000 of gain.

Souses C and D buy a house for $100,000 and sell it x years later for $600,000;
with the proceeds, they buy another house for $600,000 and sell that one x
years later for $1,000,000. No gain on either sale.

So the message is - flip your house as often as you can?

And let's not get started on whether the gain was a real gain or a phantom
inflation-created gain.

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