by Dean Zerbe, National Managing Director at alliantgroup and Former Senior Counsel to the U.S. Senate Finance Committee
Jun 29, 2016
As I’ve mentioned earlier, I don’t expect much to happen in tax this election year—except for some small-ball items closer to the end of the year (for example, provisions to further address identity theft). Nothing has changed on that front.
So with the presidential election in full swing and the candidates having put forward their policies/proposals, the House Republicans have also unveiled last week a framework for tax reform. Given the driving leadership of Ways and Means Chairman Kevin Brady (R-TX), as well as Speaker Ryan, this House tax reform proposal deserves close scrutiny for those looking for early tea leaves of what reform may look like—especially if Mr. Trump wins the White House.
I wouldn’t be overly focused on particulars (and the same goes for the proposals of the presidential candidates), but I would be interested in big ideas/themes. For example, to me the most attention-grabbing for the House Republicans is the proposal to have a 25% top tax rate for pass-through business income.
The goals for the House Republicans in tax reform is to encourage greater growth in the U.S. economy through tax code simplification and rate reduction and streamlining the IRS with an enhanced focus on customer service.
The plan seeks to fuel job creation in the U.S. economy through reform in the individual, corporate and international areas. On the individual side, the plan calls for only three individual tax brackets of 12%, 25% and 33%, instead of the current seven. Pass-through business income is given preferential treatment, with tax rates capped at 25%.
The alternative minimum tax for individuals would be repealed and individuals would be able to deduct 50% of their net capital gains. The reduced capital gains rate extends to qualified dividend and interest income. The standard deduction, additional standard deduction and personal exemption would be consolidated and individuals and families would be entitled to larger standard deductions of $24,000 for married individuals filing jointly, $18,000 for single individuals with a child in the household and $12,000 for other individuals. The child tax credit and exemptions for dependents would be consolidated into an increased child tax credit of $1,500. The estate, gift and generation skipping transfer taxes would be eliminated. To help offset the tax cuts, all itemized deductions would be eliminated, except for the charitable contribution and mortgage interest deductions.
On the corporate side, the plan lowers the corporate tax rate to a flat 20% and eliminates the corporate alternative minimum tax. A business would be able to immediately and fully deduct the cost of investments in tangible property and intangible assets instead of ratably deducting the cost over a period of years. The new expensing rule does not apply to investments in land. To help pay for these corporate provisions, net interest expense would not be deductible and most business credits and deductions would be eliminated.
On a happy note, the Republican House plan will keep the R&D Tax Credit and the Committee on Ways and Means applauds Congress making the R&D credit permanent last year. Moreover, the committee will consider options for making the credit even more efficient and effective—I’m putting together my list and welcome your thoughts and suggestions on this front.
On the international side, the reform plan adopts a territorial approach wherein exports and the foreign income of U.S. businesses will no longer be taxed. Under this approach, tax jurisdiction follows the location where the goods or services are consumed instead of produced. Additionally, the current worldwide tax system would be replaced with a 100% exemption for dividends from foreign subsidiaries. Foreign earnings accumulated under the current regime will be subject to an 8.75% U.S. tax to the extent held in cash/cash equivalents, or otherwise 3.5%. If Secretary Clinton is elected—I continue to believe that international tax reform (coupled with repatriation) is doable—even with Republican control of the Congress (or even just the House).
The plan also aims to make the IRS more efficient and streamlined. The IRS would be consolidated into three main practice groups: families and individuals, businesses and small claims court. The families and individuals unit “will focus on providing state of the art customer service so that taxpayers can get efficient help and answers to their tax questions.”
The business unit will implement the new tax code for businesses of all sizes and types, with specialists focused on startups and small businesses, and specialists focused on large domestic corporations and American based multinational corporations.
The small claims court unit would be independent of the IRS and would allow routine tax disputes to be resolved quickly and with little cost. Additionally, the revamped IRS would have a sole mission of service first, with a firm commitment to honoring the Taxpayer Bill of Rights. The new IRS will be led by an administrator appointed by the President with the advice and consent of the Senate. The administrator will serve a term of three years and may only be reappointed once.
As you can see, pretty sweeping ideas from the House Republicans. The presidential elections will largely dictate how much (or little) of these proposals go forward. alliantgroup continues to talk to Congress about reform proposals that will help innovative small and medium businesses and welcome any thoughts, ideas or suggestions you may have.
About the Author
Dean Zerbe is alliantgroup’s National Managing Director based in the firm’s Washington, D.C. office. Prior to joining alliantgroup, Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman of the Finance Committee, Senator Charles Grassley, on tax legislation. During his tenure on the Finance Committee, Zerbe was intimately involved with nearly every major piece of tax legislation that was signed into law, including the 2001 and 2003 tax reconciliation bills, the JOBS bill in 2004 (corporate tax reform) and the Pension Protection Act.