Ryan Foresees Tax Reform Legislation This Year

Today, House Speaker Paul Ryan released a joint statement on tax reform  (from the six folks working behind the scenes on tax reform - Ryan, Brady, McConnell, Hatch, Mnuchin and Cohn). Here is the key portion about tax changes:

"We have always been in agreement that tax relief for American families should be at the heart of our plan. We also believe there should be a lower tax rate for small businesses so they can compete with larger ones, and lower rates for all American businesses so they can compete with foreign ones. The goal is a plan that reduces tax rates as much as possible, allows unprecedented capital expensing, places a priority on permanence, and creates a system that encourages American companies to bring back jobs and profits trapped overseas. And we are now confident that, without transitioning to a new domestic consumption-based tax system, there is a viable approach for ensuring a level playing field between American and foreign companies and workers, while protecting American jobs and the U.S. tax base. While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform."

It appears that the plan will:

• Not be a consumption tax as proposed last June by the House Republicans. Thus, the plan won't deny a deduction for imports or exempt export revenue. And there is no need to deny a deduction for interest expense of businesses. Also, expensing of business assets is not a given, but there may be non-consumption tax reasons for allowing such expensing.  Also, with asset expensing, it's likely not all business interest expense will be deductible (assuming asset expensing is in the final plan).
• Include a rate cut for both businesses and individuals. How much of a tax reduction that translates to for taxpayers depends on what changes are made to deductions and credits, the AMT, and for higher income individuals, what happens to capital gain rates and the net investment income tax. 
• Include a shift to a territorial system. Senator Hatch noted recently that this has bipartisan support and was part of both the House plan and President Trump's 1-page plan.

So, the most significant part of the statement today is the last sentence in the excerpt above - they are not pursuing a border adjustable consumption tax.  The import tax of that was a significant revenue raiser so it also means they need new revenue raisers to support either the 20% corporate rate House Republicans want or the 15% rate President Trump seeks.

But, still lots of questions including what revenue neutral reform means in terms of how much base broadening will be needed and how the effect of changes are measured. The President's budget proposal (page 115) "assumes deficit neutral tax reform." What is the best change approach for economic growth? Will the drafters wait for Senate Finance Committee to review the ideas they received in July?

#trih - tax reform is hard

But with continued hearings, discussion, and work likely already underway on drafting legislative language, perhaps we will see a proposal this year.  And, rate reduction, base broadening and a shift from worldwide to territorial all mean major changes and rethinking for tax compliance and planning. And we'll also need to see what the states do in response to any federal changes.

What do you think?

House Republican Blueprint and Postcard Size Tax Return

On June 24, 2016, the House Republicans released their tax reform blueprint, the last part of their "Better Way" plan. The plan includes reasons for tax reform and the basics of the plan. There is no legislative language so the details are not all there.  But, here are some highlights:

• Aims to be revenue and distributionally neutral. The revenue target is the baseline that assumes current temporary tax provisions will not expire. This allows the target to be $400 billion less than the CBO baseline which assumes that the temporary provisions expire on schedule. (page 16)
• Dynamic scoring will be used in measuring the revenue effect. (page 16)
• Both the corporate and individual AMT are repealed.
• The corporate tax rate is a flat 20%.
• Individual tax rate structure – 0, 12, 25 and 33%. The 0% rate is the effective rate if income is below the standard deduction threshold and child credit amounts. Capital gains are taxed at the same rate but only 50% of investment income is taxed.
• Active business income of an individual is taxed at no more than 25%.
• Standard deduction for MFJ is $24,000, $18,000 for HH and $12,000 for Single.
• Credits: EITC, modified child credit and some type of education benefit to be designed by House Ways & Means Committee.
• Repeal the estate and generation-skipping transfer taxes; no mention of gift taxes or treatment of gains and losses at date of death.
• Businesses - immediate expensing of assets other than land and inventory. LIFO remains.
• Section 199 deduction and most credits other than for research are repealed.
• Move to a territorial system and more of a consumption tax system with a goal of being allowed to tax imports and exempt exports from tax. Details missing.
• Businesses only deduct interest expense to extent of interest income with excess carrying forward (under a true consumption tax, no interest income or expense would be reported).
• NOLs carryforward forever adjusted by an interest factor. NOLs can't reduce taxable income by more than 90%.

There are 15 specific areas where the House Ways & Means Committee is instructed to create the rule including for consolidating retirement plan rules and creating transition rules.

A centerpiece of the individual change is a postcard size return! I view this as telling us little and mostly being misleading. Our current tax system could be filed on a postcard. The size of the return submitted to the IRS just depends on how much summary information can be tolerated. Today's postcard could have the taxpayer's identification information, taxable income, tax, aggregate credits, refund/payment, signatures. That says nothing about the complexity of calculating all of these figures.

Here is the proposed postcard from the Republican Blueprint:

There is a lot missing from the postcard:

• Taxpayer's name, address and Social Security number.
• Dependent information.
• Business, rental and partnership information (Schedules C, E, and F).
• Capital gains and loss and Schedule D.
• Schedules for computing the credits (today forms exist for the EITC and education credits).
• What to do with the refund (today's return has information for direct deposit of the refund).
• Penalty of perjury statement.
• Taxpayer and preparer signatures.

And of course, as most people file using software and file electronically, it is not so much the size of the final return which they might not even print out, but the number of questions required to get the return completed and the number of records to be gathered and maintained to prove income, deductions, credits and estimated tax payments.

I'll have more soon in an article I'll post.

There are many items in the plan worthy of discussion. A lot more details are also needed for that discussion.

What do you think?