Yesterday, House Ways and Means Committee Chairman Dave Camp (R-Michigan) unveiled his comprehensive tax reform proposal. Released as draft legislation, the Camp proposal calls for the most fundamental reform of the tax code in 27 years.
Upon releasing the plan, Camp said his reforms would make the tax code simpler and fairer for families and job creators, spur economic growth, create jobs, and put money back in the pockets of hardworking taxpayers.
The proposal would reduce the top individual tax rate to 25 percent from 39.6 percent and the corporate tax rate to 25 percent from 35 percent. The seven individual tax brackets would be reduced to two brackets of 10 and 25 percent, and a 10 percent surtax would be imposed on certain income above US$450,000. Capital gains and dividends would be taxed as ordinary income, with a 40 percent exclusion.
The lower tax rates would be offset by eliminating or limiting a long list of individual and corporate tax deductions, exclusions and credits.
The plan proposes major changes in international tax rules, moving to a competitive international system by providing a 95 percent exemption for dividends received by US corporations attributable to the foreign business income of their overseas subsidiaries, while imposing tax at a 15 percent rate on intangible income from sales to foreign markets.
The plan targets a number of major corporate tax breaks, including accelerated depreciation and inventory accounting, revises partnership taxation, and makes changes in the taxation of financial products, and imposes a 3.5 basis points tax on assets of banks and insurance companies with assets over US$500 billion. The plan would also change the taxation of carried interest.
An analysis of the plan by the Joint Committee on Taxation projects that the tax changes would increase gross domestic production by up to 1.6 percent a year over the next 10 years, adding up to US$3.4 trillion in GDP over the decade. The plan would also add up to 1.8 million new jobs, and raise US$700 billion in new revenue. Recently the Director of the Congressional Budget Office indicated that these macroeconomic effects of tax reform could be scored as raising revenue, a potentially bridging the gap between Republicans, who seek to reduce rates and relative tax burdens and Democrats who argue for raising additional revenues in tax reform.
While enactment of tax reform during this election year appears unlikely, the Camp draft represents a major contribution to a tax reform debate that is likely in time to result in major changes to the federal tax system. Despite election year pressures, Chairman Camp said he intends to press for committee action on his proposal, and the new Chairman of the Senate Finance Committee, Ron Wyden (D-Oregon), who refers to the current tax system as a “rotten dysfunctional mess” has indicated that tax reform will be one of his top priorities as well. Wyden is the only Member of the Senate Finance Committee who has authored a comprehensive bipartisan tax reform proposal, the Wyden-Coats proposal from the last Congress.
We can expect a robust debate on many particular aspects of the Camp proposal, but perhaps its most important feature is how closely it aligns itself with major trends in the tax reform debate over the past several years both in the United States and among US trading partners, notably the exchange of tax expenditures for lower rates, the adoption of some form of minimum tax on overseas income, the elimination of provisions favoring particular industries and high-wealth individuals, and simplification through the consolidation of duplicative provisions. In that respect, and regardless of its short term prospects, the Camp proposal is likely to accelerate the debate on fundamental tax reform.
A brief description of the major provisions of the Camp plan follows. In the near future, we will be providing a more in-depth analysis of the plan to assist those interested inmaking their voices heard in the process.
INDIVIDUAL TAX CHANGES
The plan reduces the present law tax brackets to two brackets of 10 and 25 percent, with a 10 percent surtax on single filers above US$400,000 and joint filers above $450,000. The surtax would apply to a new definition of modified adjusted gross income that would include employer-provided health benefits, tax-exempt interest, deferred contribution retirement plans and other excluded income.
Other proposed changes would:
• Repeal the deduction for state and local income and property taxes
• Limit future home mortgage interest deduction to mortgages below US$500,000 and repeal the deduction for future home equity loans
• Repeal the deduction for medical expenses
• Repeal the individual minimum tax
• Tax long-term capital gains and dividends as ordinary income, with a 40 percent exclusion
CORPORATE TAX CHANGES
The plan would reduce the corporate tax rate to 25 percent, phased in by 2 percentage points a year for 5 years, from 2015 to 2019. In order to offset the rate reduction, the plan would repeal, limit, or revise a large number of deductions, exclusions, and credits.
Proposed changes would:
Repeal accelerated cost recovery system and replace with new rules reflecting the useful lives of property
Make the R & D credit permanent. Require future R & E expenditures to be amortized over 5 years
Limit the deduction for advertising expenses to 50 percent, with the balance amortized over 10 years
Repeal the LIFO method of accounting
Phase out the deduction for domestic production activities
Repeal the deferral of gain on like-kind exchanges
Expand the US$1 million executive compensation deduction limit to include performance-based compensation
Repeal most energy tax incentives, for both fossil fuels and alternative energy
Repeal the corporate minimum tax
INTERNATIONAL TAX CHANGES
The plan would incorporate elements of the dividend exemption system that Chairman Camp proposed in late 2011 as a way of bringing the US international system closer to a competitive territorial system.
Proposed changes would:
Exclude 95 percent of dividends paid for a foreign corporation to US 10 percent shareholders, resulting in a 1.25 percent tax once the 25 percent new US corporate rate is fully phased in.
A one-time 8.75 percent tax would be imposed on US 10 percent shareholders of foreign subsidiaries accumulated earnings and profits since 1986 not previously subject to US tax. Any tax paid to foreign jurisdictions could be credited against this tax which would be payable over a period of eight years.
US parents of foreign subsidiaries would be subject to tax under Subpart F on the foreign subsidiaries’s intangible income at a rate of 15 percent (profits on products destined for the US market would be taxed at 25 percent).
FINANCIAL PRODUCTS AND SERVICES
A number of new taxes would apply to banks and other financial institutions and life insurance companies. Among these are a quarterly excise tax of .035 percent on the total consolidated assets of financial institutions with assets in excess of US$500 billion.
The plan would modernize the tax treatment of financial products, including a provision extending mark-to-market accounting treatment of financial dividends