Tax Reform Aims to Simplify the Code, Slash Some Rates, Boost the Economy

The plan, developed by GOP representatives from the White House, Senate, and House of Representatives, is an outline of proposals that would be the biggest change to the U.S. tax code in more than 30 years. The proposals must still pass legislative committees in both houses of Congress, which could change or drop parts of it as lobbyists and individual members weigh in. But House Speaker Paul Ryan is calling it a “unified framework” that has broad Republican support.

“We really believe that we have a historic chance at prosperity in this country,” Ryan said Tuesday. “Our Republican leaders in the House, the Senate, and the White House have come together on a concrete framework for historic tax reform. … I can’t tell you how excited we are about this. This is not just a big moment for Congress, it’s a big moment for Americans.”

The proposed changes would affect nearly every taxpayer, and they seek to balance significant rate cuts for businesses with measures designed to help the middle class. Expect Democrats and the media to pounce on any changes that could result in wealthy people or companies saving money.

The changes, according to a senior GOP source in Congress, include:

• Altering individual tax brackets. There are now seven tax brackets ranging from 10 percent to 39.6 percent, which would be condensed into three brackets of 12 percent, 25 percent, and 35 percent. Legislators could impose another bracket above 35 percent.
• Nearly doubling the standard deduction. The standard deduction would nearly double, to $24,000 for married couples and $12,000 for individuals, and would include personal exemptions. This change reduces the effect of itemized deductions, which would make the tax code simpler and fairer. About two-thirds of households already take the standard deduction, a figure that would likely increase under the plan.
• Ending most itemized deductions. The plan would keep the popular mortgage-interest and charitable-giving deductions but calls for ending many others, but legislative committees will sort out the details. Federal deductions that could be on the chopping block include medical expenses, state and local income taxes, moving expenses and gambling losses.
• Increasing the child tax credit. The plan is light on details here, but leaders plan to significantly increase the $1,000-per-child credit as well as make it more available to people with higher incomes. Currently, the credit begins phasing out for married couples starting at $110,000 in earnings.
• Repealing the alternative minimum tax (AMT) and estate tax.
• Slashing the corporate tax from 35 percent to 20 percent. Economists say this would be a major boost to the economy because it allows companies to pay workers more, invest in equipment, and return money to shareholders. It also makes the U.S. more competitive internationally.
• Capping taxes on small businesses at 25 percent. Most business owners file taxes on their individual tax forms and pay the individual rates, which are as high as 39.6 percent. Legislation would include to-be-determined rules preventing a possible loophole in which high-income individuals reclassify their earnings as business income.
• Full business expensing over five years. This sounds like a snoozer, but it is a potentially big source of economic growth, because businesses would see major tax advantages to investing in machinery and other equipment. They could write off the costs of those investments over five years, instead of following existing depreciation schedules that stretch up to 39 years.
• Repeal most business deductions, exclusions, and credits. The plan would keep credits for business research and development and low-income housing, but all other deductions available to businesses could be repealed. Legislative committees will have the final say.

The tax-reform outline does not mention changes to other taxes, including those on capital gains and dividends as well as newer taxes imposed as part of the Affordable Care Act. The plan does not call for changes in the tax treatment of retirement or college-savings plans, either. It generally encourages a tax code that supports work, education, and retirement, the source said.

There is still plenty of work to do to advance the tax plan. Republicans must limit defections in their ranks, navigate complex Senate budget rules, weather projections of the plan’s cost, and make a compelling case to the public — especially since airwaves will be filled in the coming days with talk of “voodoo economics,” “millionaires and billionaires,” and “giveaways to plutocrats.”

In reality, the Republicans are releasing a bold tax plan that boosts the economy, benefits most taxpayers and embraces a longtime dream of simplifying taxes. Let’s see if they can get it done.