About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline
LOG IN
LOG IN

1 1 (August 2, 2017)

handle is hein.crs/govcfyy0001 and id is 1 raw text is: FF. ' riE S-' $. h ,i , August 2, 2017 Key Issues in Tax Reform: The Better Way House Plan On June 24, 2016, House Speaker Paul Ryan released the Better Way Tax Reform Task Force Blueprint, which provides a revision of federal income taxes. (For an analysis of the plan, see CRS Report R44823, The Better Way House Tax Plan: An Economic Analysis, by Jane G. Gravelle.) The plan does not specify all changes that might broaden the base or any transition rules. For the individual income tax, the plan would broaden the base by disallowing itemized deductions except for mortgage interest and charitable deductions, lower the rates (with a top rate of 33% compared to 39.6% under current law), and alter some of the elements related to family size and structure by eliminating personal exemptions, allowing a larger standard deduction, and adding a dependent credit. The current earned income credit and child credit would not be altered. Capital gains, dividends, and interest would be taxed at 50% of ordinary rates; currently, capital gains and dividends are subject to a top rate of 20% and interest is taxed at ordinary rates. For business income, the current income tax would be replaced by a cash-flow tax, with a top rate of 20% for corporations and 25% for individuals' (pass-through) capital income. A cash-flow tax allows investments, such as purchases of buildings and equipment, to be deducted when incurred rather than through depreciation deductions over time and results in a zero tax rate on new investment returns. The cash-flow treatment would not apply to land and apparently not to inventories. Interest would no longer be deducted. The tax would be border-adjusted (imports taxed and exports excluded), making domestic consumption the tax base, although a recent announcement from congressional leaders and administration officials has indicated that a border adjustment would be dropped in any future tax plan. The border adjustment may not be complete because it would not allow a refund of the export deduction when it creates an overall loss, but rather a carryover of losses with interest. The system would also move to a territorial tax in which foreign source income (except for easily shifted income) would not be taxed. The proposal would repeal the domestic production activities deduction but retain the research tax credit. The proposal would repeal estate and gift taxes. Although the Affordable Care Act (ACA) taxes are not repealed in the Better Way tax reform proposal, ACA taxes are repealed in the House-passed American Health Care Act. Efliet \w-Y,2Wiice.ncy aznd Gmowt~h One objective of tax reform is to increase output and efficiency. The plan would achieve efficiency gains, particularly in the allocation of capital by type and industry and in the even treatment of debt and equity finance. Current effective corporate tax rates on new equity investments are negative or zero for investment in intangibles, around 24% for equipment, and up to 36% on some structures. Overall, including taxes on shareholders and creditors, effective tax rates are around 22% for corporate equity financed investments and a negative 44% on debt financed investments; the new plan would result in rates close to zero for both. Similar narrowing of tax differentials would occur for unincorporated businesses. The plan's estimated output effects appear to be limited in size and possibly negative. The direct effect of lower marginal tax rates on labor supply is limited because the reduction in marginal tax rates is small and largely offset by an increased base that increases effective marginal rates. Capital income effects are also somewhat limited even with the movement to a cash-flow tax (that generally imposes a zero rate) because the current effective tax rate is low, due to current accelerated depreciation and the negative tax rate on debt-financed investment. Growth effects are also limited because most empirical evidence does not support large savings and labor supply responses. As currently proposed, the plan loses significant revenue which, according to some estimates, could more than offset the supply responses because the increased government borrowing would crowd out private capital investment. The effect on international capital flows is ambiguous as the cash-flow tax, while encouraging equity capital to move from abroad, would discourage inflows of debt. The plan would eliminate many distortions associated with multinational firms, including eliminating the tax treatment that discourages repatriation of foreign source income to the United States and the incentive for firms to invert (shift headquarters abroad) by merging. It would also largely eliminate profit shifting to low-tax countries, although if border adjustments are eliminated, the effect on profit shifting is ambiguous. Although the disallowance of interest deductions and lower tax rates would reduce profit shifting incentives, a territorial tax tends to induce more profit shifting through transfer pricing of intangibles. Without the border adjustment, the incentive to invert would not be entirely eliminated but would be substantially reduced. Exchange rate adjustments (the dollar should appreciate by 25%) should eliminate any effect of the border adjustment on imports and exports, although how quickly that adjustment would occur is uncertain. If firms cannot merge or otherwise find ways to deal with the lack of refundability of the value of the deduction for exports, the measure would reduce imports. The proposal would have effects on vertical equity (progressivity, or how the tax burden changes as income .O 'T p\w -- , gnom goo mppm qq\ M , q 'M I 11LULANJILiM,

What Is HeinOnline?

HeinOnline is a subscription-based resource containing thousands of academic and legal journals from inception; complete coverage of government documents such as U.S. Statutes at Large, U.S. Code, Federal Register, Code of Federal Regulations, U.S. Reports, and much more. Documents are image-based, fully searchable PDFs with the authority of print combined with the accessibility of a user-friendly and powerful database. For more information, request a quote or trial for your organization below.



Short-term subscription options include 24 hours, 48 hours, or 1 week to HeinOnline.

Purchase Access

Contact us for annual subscription options:

Contact Us

Already a HeinOnline Subscriber?

Log In

profiles profiles most