United States

Bipartisan tax reform plan introduced by new Senate Finance Chair

INSIGHT ARTICLE  | 

With new leadership coming to the Senate Finance Committee this year (and to the House Ways and Means Committee after 2014), what can we anticipate in the way of tax reform? One way to anticipate the future is to review the bipartisan tax reform plan introduced by the incoming Senate Chair, Senator Ron Wyden (D. Ore.), and Representative Dan Coats (R. Ind.), a leading voice on the Ways and Means Committee. The main theme of the Wyden-Coats bill is tax simplification, accomplished by reducing the number of deductions, credits, and preferences and providing for lower income tax rates.

For individuals the bill would provide for only three rates (above the zero rate for those with the lowest incomes)–15 percent, 25 percent and 35 percent. The alternative minimum tax (AMT) would be eliminated. In addition, middle class and low-income taxpayers would benefit from a tripling of the standard deduction.

The tax reform plan would treat all capital gains and dividends, including qualified dividends, as ordinary income, but would offer a 35 percent exclusion for capital gains. In effect, the top tax rate for capital gains would be 65 percent x 35 percent, or 22.75 percent. Under the tax plan, only mortgage interest and charitable contributions would remain as deductions, and deductions for state and local income taxes and real estate taxes, medical expenses, and miscellaneous itemized deductions would be eliminated. The plan would begin to treat the value of employee fringe benefits, such as deferred compensation, as taxable income. Senator Wyden hopes that these changes would result in a simple one-page tax return for most individuals, and a sample individual return is featured on Senator Wyden’s website. 

In addition, the plan calls for changes to the corporate income tax. Tax incentives for small business investments would be increased by allowing expensing of all investments in depreciable property for businesses with up to $1 million of annual gross receipts. In addition, there would be only a single corporate income tax rate of 24 percent and no AMT for corporations. This is intended to put the United States in a better competitive position relative to countries such as France, Canada and Germany.

In order to pay for the reduction of the corporate tax rate to 24 percent and the elimination of the corporate AMT, the Wyden-Coats bill would limit the interest-paid deduction for corporations, repeal accelerated depreciation and change certain inventory rules. It would also eliminate the indefinite tax deferral currently allowed for foreign corporate earnings and change the computation of the foreign tax credit. In addition, the bill would increase taxes on oil and gas companies by eliminating tax preferences for intangible drilling costs and similar items. Finally, the bill would also eliminate special incentives like the domestic manufacturing deduction, research credits, low-income housing credits and wind energy product credits.

Conclusion

Few expect tax reform to be seriously considered this year. Next year, the most crucial factor affecting tax legislation will be the question of who controls the House and Senate after the 2014 elections. Although bipartisan, some observers view the Wyden-Coats plan as reflecting a severe change to current law, with significantly lower rates and virtually no business tax preferences. Indeed, it is only by reducing the business deduction for interest expense, such as interest on corporate debt, that the bill is able to reduce the corporate tax rate to 24 percent. Without that change, most observers have concluded that the rate could not be lowered below 28 percent. It remains to be seen whether a consensus for such a severe move towards “tax neutrality” really exists, especially among those who would lose more in tax preferences than they would gain in rate reduction. Though tax reform may not become a reality in the near term, Senator Wyden continues his quest for comprehensive tax reform and expressed on a recent television news show his desire for a “progressive tax code that lowers rates by eliminating special interest tax breaks.”

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