Politico - After Much Tax Reform Talk, House GOP Finally Agrees On A Plan

News Article

By Unknown

House Republicans have said for years they want to reform the tax code and now, after much debate, they finally have a consensus plan.

GOP lawmakers are set Friday to unveil a tax code rewrite that substantially differs from ideas they've previously put forward, one that will call for a much deeper cut in the corporate tax rate -- to 20 percent from 35 percent.

At the same time, Republicans are backing off plans to slash the top individual tax rate. They're settling for a top rate of 33 percent, not 25 percent as they've long proposed. The current top rate is 39.6 percent.

And they want to push the code closer to a consumption-style tax, where the government focuses more on taxing the money people spend, rather than what they earn.

"Our blueprint will deliver a tax code built for growth -- the growth of jobs, the growth of paychecks and the growth of our economy," said House Ways and Means Committee Chairman Kevin Brady.

The 35-page plan, the sixth and last in a series of policy blueprints Republicans have rolled out over the past month, is a departure from a major GOP tax reform plan released just two years ago that proved hugely unpopular among lawmakers.

The new proposal is aimed at not only getting their fractious caucus on the same page on an issue they've long called one of their top priorities. It also amounts to their opening bid in any tax reform effort, one that comes as their presumptive presidential nominee Donald Trump has offered a very different plan.

Trump's proposal is far more costly, and places a much bigger emphasis on reducing individual tax rates.

"We have a fairly high level of confidence that Mr. Trump will support a majority of these provisions," a House Republican leadership aide said. But "there are clearly going to be differences."

The plan, coming just months before the November elections, presents some risk for House Republicans because it identifies some of the popular breaks they'd chop in order to pay for the proposal.

They want to eliminate nearly all itemized deductions, for example, including a longstanding writeoff for state and local taxes. Their plan contemplates changes in the hugely popular mortgage interest and charitable deductions. They also want to cut most business tax breaks, including one for interest expenses that's been part of the tax code for a century.

Even before the plan was released, the left-leaning Americans for Tax Fairness was trashing it as a sop to the rich.

"House Speaker Paul Ryan and Donald Trump may disagree on some issues, but they are united when it comes to giving huge tax breaks to the wealthy and big corporations," the group said.

Republicans have been calling for tax reform since they took over the House in 2011, but they've struggled among themselves to agree on how.

They initially asked their then-Ways and Means Chairman Dave Camp to devise a plan. He spent three years writing a 979-page proposal that was the most comprehensive tax reform plan in a generation. But his fellow Republicans hated it and, in the wake of Camp's retirement, they offered a range of alternatives, including a national retail tax, a flat tax and a value-added tax.

At the direction of Ryan, Republicans have been working on a new blueprint, setting aside other priorities like a promised rewrite of the international tax code.

The revised proposal calls for reducing the number of individual tax brackets to three from seven, with rates set at 33 percent, 25 percent and 12 percent, compared to the current range of 10 percent to 39.6 percent.

It would offer a substantial cut on capital gains and dividends, a provision aimed at rewarding savings that are invested. They'd be taxed at 16.5 percent, 12.5 percent or 6 percent, depending on how much the investor earned. The top rate is currently 23.8 percent.

The plan would dramatically expand the standard deduction as well as the child tax credit by consolidating various exemptions and credits. That would drastically cut the number of people who itemize their deductions, to about 5 percent, Republicans estimate, from the current one-third.

Though the plan does not say how they intend to change the mortgage and charitable deductions, it says tax writers are looking for ways to make them "more effective and efficient."

Republicans are going beyond their years-old promise to cut the corporate rate to 25 percent, saying that is no longer sufficient.

"The pressures on our companies have become stronger and stronger and I think there is a view among House Republicans that 25 percent is not good enough anymore," another senior aide said.

That, along with other provisions in the plan, "would completely eliminate any reason" for a so-called corporate tax inversion, the aide said, referring to efforts by companies to avoid paying U.S. taxes by moving their legal headquarters abroad. Republicans would also cut the top small business tax rate to 25 percent.

They want to pay for that by eliminating "most" business breaks, including a popular provision known as a Section 199 deduction that subsidizes manufacturing.

They also want to move to a territorial system, where the government would not attempt to tax companies' overseas profits. They'd apply a one-time 8.75 percent tax on money that's already overseas in liquid assets, with a 3.5 percent tax on money invested abroad in things like factories.

Republicans say no income group would pay a higher average federal tax rate than they currently do, though aides could not say whether any would disproportionately benefit.

Aides also said the plan would not add to the deficit, though Congress' budget scorekeepers would likely consider it a tax cut. (Republicans want to use a so-called "current policy" baseline that assumes a number of temporary tax breaks will be renewed. That would free up about $400 billion, Republicans say).

Rather than refining Camp's proposal, Republicans are going in entirely new directions.

While Camp tried to finance his plan by squeezing business investment writeoffs, Republicans now want to do the opposite, and make them more generous.

Camp was criticized for not eliminating the disparity between tax rates on small businesses and corporations; Republicans are now proposing to substantially narrow that gap.

Many businesses didn't like Camp's "anti-base erosion" provisions that were aimed at preventing companies from avoiding U.S. taxes by booking profits overseas. Republicans are dropping those provisions in favor of raising taxes on imports.

Republicans are also scotching plans for a so-called patent box. They released a draft of a plan last July that would have given companies a special low rate on income derived from intellectual property, like those used in many European countries. Republicans had said that was needed to make the U.S. more competitive internationally, though they now say it's unnecessary, given other changes in their proposal.

Source