House GOP Tax Reform Plan (June 27)

Mike & Co. —

Last week, the House GOP capped off a month of policy events, announcing a new tax reform plan.  The  proposal is aimed not only at getting the fractious caucus on the same page on an issue long a top GOP priority but also at creating some space between Congressional  Republicans and the party’s presidential nominee to insulate the former against the latter.

No official scoring has been offered estimating the cost of the tax plan, though the authors say they are aiming for revenue neutrality.  The plan is part of Speaker Ryan’s A Better Way policy platform, which includes plans to address poverty, security, health care, and the economy.  While many of its proposals are what you’d expect from a GOP tax plan, some new proposals have made the cut this time around.

What’s in it and what should we expect next?

Best,

Dana

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 Business Tax Proposals

  •  Cut corporate tax rate: The corporate tax rate will be lowered from 35 to 20 percentwhile small businesses will pay 25 percent.
  •  Adopt a territorial tax system: Corporations will not pay taxes on income earned overseas.
  •  Move to a “cash flow” based tax system:  A popular idea among conservative circles, the plan embraces taxes against cash flow as opposed to income.
  •  Allow the immediate expensing of capital investment:This will likely come at the cost of the interest payment deduction for businesses.

Individual Tax Proposals

  •  Institute three tax brackets: The top rate of 39.6 percent moves to 33 percent.  Other brackets are 12 and 15 percent.
  •  Increase the standard deduction, child credit, and EITC:  A larger standard deduction takes the place of many itemized deductions and credits, while GOP favorites, like the EITC, charitable contribution credit, and mortgage interest rate deduction will stay.
  • Eliminate the alternative minimum and estate tax: Itwouldn’t be a Republican tax plan without these two taxes on the chopping block.
  •  Cut rates on investment income: Only half of investment income will be included when calculating a person’s taxable income.  That would create a new rate structure of 6 percent, 12.5 percent and 16.5 percent.

New Features

The plan’s top personal income tax rate is set much higher than previous plans, which often contained provisions of 25 percent or less – 33 percent is a major increase from there.  That higher-than-expected rate is likely more than made up for by the plan’s treatment of investment income

Investment income receives a significant boost in the plan. The ability to deduct 50  percent of all investment income from taxable income is meant to encourage Americans to invest and save but will also certainly be a boon to wealthy taxpayers.

On the corporate side, including a consumption-based tax on businesses is novel.  This type of tax most recently made a splash when a number of GOP presidential hopefuls included them in their plans last year, but they have been gaining support in conservative think tanks for some time now.  The same goes for creating a territorial tax system, whereby international earnings are not taxed against American businesses.

Old Chestnuts

The plan’s more favorable treatment of investment income could more than make up for the plan’s 33 percent income tax on the wealthy.  While that top tax bracket is higher than is usually seen in conservative plans, the ability to discount one-half of all investment income is a major benefit for the most affluent.

Conservatives in general, and Ryan specifically, have long called for an increase in the EITC and the child tax credit.  They also defend the home mortgage interest rate deduction and the charitable contribution deduction.  As such it’s not surprising that these tax incentives were singled out for special mention in their tax plan.  What’s missing is a list of all the other bits of tax code that are supposedly being cut to make room for income tax cuts.

Ending the alternative minimum tax and the estate tax are long-standing goals of the GOP and as such are standard in plans like this.  So is the promise to cut out the many itemized deductions and credits available to individuals and businesses alike – a major pillar in the conservative argument for simplifying the tax code.

Corporate vs. Individual Reform

It’s not surprising that the corporate tax system sees more radical changes in this plan.  Proposals to institute a consumption tax, a territorial taxation system, and to eliminate the corporate alternative minimum tax should make many in the business community happy.  One notable exception: corporate real estate companies and asset managers, who stand to lose money if the interest rate deduction is killed.

Despite lacking the bells and whistles of the corporate side of things, individual rate payers haven’t been neglected.  High Investment income treatment and an end to estate taxes are big benefits for them, not to mention a reduction in income taxes (though it’s not as steep a reduction as we’re used to seeing).

The Plan’s Purpose and Prospects

GOP lawmakers say that they’ve learned from the failure of Dave Camp’s 2014 tax plan.  That experience was the impetus behind this much more radical proposal, which likely won’t be fully fleshed out until 2017.  The plan as it stands today amounts to House Republicans’ opening bid in any tax reform effort.

While no scoring has been released yet, the plan reflects familiar GOP imperatives: no tax increases and no deficit increase.  That means it will rely heavily on optimistic dynamic revenue estimates.  On top of these considerations, any plan to “simplify and flatten” the tax code will require a greater level of enforcement to make sure that taxable income is properly collected.  Creating zero new taxes on exports and profits earned overseas will tempt companies to come up with ways to make their income fit either description.  That goes against the plan’s promise to effectively neuter the IRS.

Moving Forward

Republicans have announced this tax plan late in the game for 2016.  And it’s as much a matter of policy as it is of the political reality facing them.  House leadership may be itching to set out a plan that is seen as more reasonable compared to Donald Trump’s $9.5 trillion slash-and-burn proposal. Additionally, they may be trying to set up a gentle glide path toward a compromise on tax reform with Democrats.  Because of that, don’t expect to see much further development on this plan – a scoring should come in the near future, but real legislation probably won’t come with it.

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