House Ways and Means Committee chairman Dave Camp, R-Mich., has released his long-awaited draft legislation on tax reform, to mixed reviews.
Based on analysis by the independent, nonpartisan Joint Committee on Taxation, without increasing the budget deficit, the Tax Reform Act of 2014 would create up to 1.8 million new private sector jobs, allow roughly 95 percent of filers to get the lowest possible tax rate by simply claiming the standard deduction (no more need to itemize and track receipts), strengthen the economy and increase gross domestic product by up to $3.4 trillion, the equivalent of 20 percent of today’s economy.
Based on calculations using data provided by JCT, the average middle-class family of four could have an extra $1,300 per year in its pocket from the combination of lower tax rates in the plan and higher wages due to a stronger economy.
During Camp’s three years as Chairman of the Ways and Means Committee more than 30 separate congressional hearings were held dedicated to tax reform. Eleven separate bipartisan tax reform working groups were created in conjunction with ranking member Sander Levin, D-Mich., three discussion drafts were issued and more than 14,000 public comments were received at TaxReform.Gov.
“This legislation does not reflect ideas solely advanced by Democrats or ideas solely advanced by Republicans, nor is it limited to the halls of Congress,” said Camp. “Instead, this is a comprehensive plan that reflects input and ideas championed by Congress, the Administration and, most importantly, the American people.”
“It does, in fact, broaden the base and lower the rates,” observed Don Williamson, CPA, executive director of the Kogod Tax Center at American University. “It is intended to strengthen the economy by lowering the rates. The premise is that there would be more money in peoples’ pockets to buy things. However, I don’t consider it real simplification. There will still be a lot of business for tax preparers and accounting firms.”
“Everyone assumes the bill is DOA [dead on arrival],” Williamson added. “However, the details are likely to serve as a template for future proposals.”
Among the highlights of the Tax Reform Act of 2014 are the following:
New Individual and Corporate Rate Structure: Flattens the code by reducing rates and collapsing today’s brackets into two brackets of 10 and 25 percent for virtually all taxable income, so over 99 percent of all taxpayers would face maximum rates of 25 percent or less. The plan also would reduce the corporate tax rate to 25 percent.
Larger Standard Deduction: Makes the code simpler by providing a significantly more generous, inflation-adjusted standard deduction of $11,000 for individuals and $22,000 for married couples.
Larger Child Tax Credit: Increases the child tax credit to $1,500 per child, adjusts it for inflation going forward and expands the number of families that can claim the credit.
Simpler, Improved Taxation of Investment Income: Taxes long-term capital gains and dividends as ordinary income, but exempts 40 percent of such income from tax, resulting in a 3 percentage point decrease from the maximum rates individuals pay today on such income while also achieving the lowest level of double taxation on investment income in modern history.
No AMT: In addition to lowering tax rates for families and all job creators, the plan repeals the Alternative Minimum Tax for individuals, pass-through businesses and corporations.
Easier Education Benefits: Adopts recommendations stemming from the bipartisan working groups to consolidate education tax benefits so, along with the additional money from stronger economic growth, families could more easily afford the costs of a college education.
Modernized International System: Modernizes the international tax code for the first time in more than 50 years while protecting jobs, wages and profits from being shipped overseas.
Permanent R&D Incentive: Invests in innovation by making permanent an improved Research & Development Tax Credit.
More Affordable Health Care: While the plan generally leaves ObamaCare policies untouched and for a later debate on health care, there are two main exceptions given strong bipartisan support for: (1) repeal of the medical device tax and (2) repeal of the medicine cabinet tax, which prohibits use of funds from tax-free accounts to purchase over-the-counter medication without first obtaining a prescription.
Infrastructure Investment: Dedicates $126.5 billion to the Highway Trust Fund to fully fund highway and infrastructure investment through the HTF for eight years.
Simplification for Seniors: Reflecting a proposal supported by AARP and Americans for Tax Reform, the plan requires the IRS to develop a simple tax return to be known as Form 1040SR for individuals over the age of 65 who receive common kinds of retirement income like annuity and Social Security payments, interest, dividends and capital gains.
Charitable Giving: Expands opportunities to make tax-deductible contributions past the end of the tax year, makes permanent conservation easement incentives, simplifies exempt organization taxes and sets a floor instead of a cap to the amount of donations that can be deducted. The economic growth in this plan will increase charitable giving by $2.2 billion annually.
Shrinks and Simplifies the Income Tax Code: In addition to easing complexity and compliance burdens by adopting a larger standard deduction, an enhanced child tax credit and lower rates, the plan repeals over 220 sections of the Tax Code, cutting the size of the income tax code by 25 percent.
The proposal to tax capital gains as ordinary income while exempting a percentage of the income from tax is a throwback to the way capital gains were taxed years ago, noted Williamson.
Other reactions were mixed. Ways and Means Committee ranking member Sander Levin D-Mich., stated, “Chairman Camp’s tax reform proposal opens up a discussion that Democrats have wanted to engage in on a bipartisan basis. As Democrats, we believe it is vital that tax reform encourage economic growth, support working families, broaden the middle class, and address income inequality. It must produce a fairer and more adequate tax code for all Americans, ensuring that wealthy individuals and corporations pay their fair share while preserving our long-term economic security in a fiscally responsible way that promotes jobs in the United States. It is through the lens of those priorities that we will review Chairman Camp’s proposal in detail as the Committee undertakes a thorough examination of his proposal.”
“Congressman Camp is to be congratulated for following through on his commitment to comprehensive tax reform,” said Hank Gutman, director of KPMG’s Federal Tax Legislative and Regulatory Services group in the firm’s Washington National Tax practice and a former chief of staff for the Joint Committee on Taxation. “Even if comprehensive tax reform does not advance this year, these proposals will create a context for debate and could serve as a template for subsequent reform efforts. Business leaders would be wise to take the time to understand these proposals, so that they can begin to assess their potential implications.”
The National Retail Federation said that the Camp tax reform proposal would boost the economy. “This plan would give our nation the simpler, fairer tax system that we desperately need, but it’s about far more than just tax reform,” said NRF president Matthew Shay. “This is the foundation for job creation, increased take-home pay and business growth that would restore the prosperity that has slipped away for far too many American families.”
On the negative side, George Goehl, executive director of National People’s Action, said, “At a time when Americans are frustrated with growing economic inequality, Representative Camp’s proposal to lower rates, while failing to generate additional revenue, takes us in exactly the wrong direction. The proposal would further erode the share of revenue corporations and the wealthy contribute, despite the fact that we’re already collecting less and less from those who can most afford it.”
“Instead of doubling down on the failed policies of past decades, lawmakers must require big corporations and the wealthy to contribute a greater share of the funds needed to bolster our government’s fiscal health,” Goehl added. “Only then will we be able to adequately fund programs that benefit all Americans and build the framework that will move our nation forward in the years ahead.”