Renacci releases comprehensive tax reform option (with credit-invoice VAT)

Renacci releases comprehensive tax reform option

A Republican member of the House Ways and Means Committee this week released a plan for a comprehensive tax reform option with a credit-invoice value added tax (VAT).

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Rep. Jim Renacci (R-OH), a member of the House Ways and Means Committee, on July 14, 2016, released a white paper [PDF 1.47 MB]—Simplifying America’s Tax System (“SATS plan”)—outlining a comprehensive tax reform proposal.

Business-related tax proposals

With respect to businesses, the SATS plan would:

  • Eliminate the corporate income tax.
  • Institute a 7% business activity tax (described as similar to a consumption tax plan previously introduced by Sen. Cardin (D-MD)). This tax would be a credit-invoice VAT. That is, businesses would collect tax on their sales, but tax would be reduced “in the form of a credit for tax paid on purchases (i.e., inputs) invoiced from other firms.”   
  • Impose a one-time tax on accumulated foreign earnings held abroad—8.75% for profits held as cash and cash equivalents and 3.5% on other assets—and dedicate the revenue from this tax to the Highway Trust Fund.

Proposals for individual taxation

With respect to individuals, the SATS plan proposes:

  • Consolidate the current seven marginal rate brackets into three brackets: 10%, 25%, and 35%.  Notably, (1) the 10% bracket would be extended to $50,000 and $100,000 for single and joint filers, respectively, while (2) the 25% bracket would be extended to $750,000 and $1,500,000 for those respective filers. Thus, the 35% bracket would only apply to individuals with income in excess of those amounts.
  • Increase individual income tax exemptions, retain the child tax credit, and substantially increase the Earned Income Tax Credit (EITC).
  • Eliminate all itemized deductions except: (1) the charitable contribution deduction; and (2) the mortgage interest deduction (up to $500,000 of debt).
  • Repeal the alternative minimum tax (AMT).
  • Tax capital gain and dividends at the same rates as ordinary income. (The white paper explains that repealing the corporate income tax obviates the need to treat capital gains and dividends different than ordinary income.)

Request for stakeholder comments

Rep. Renacci has indicated that he views his white paper as the “beginning of the conversation” and that he seeks feedback from taxpayers. While general comments are welcome, he is particularly interested in comments on particular questions set forth in the white paper concerning:

  • Treatment of financial services
  • Exemptions from the VAT for “small businesses” and for other types of commercial activities
  • How to harmonize the VAT with existing excise tax regimes
  • What additional rules might be required for passthroughs that choose to become C corporations to take advantage of the new rules and, for those that stay passthroughs, what rules should be required with respect to losses
  • Treatment of accumulated earnings and passive investment income
  • How to prevent corporations from minimizing compensation paid to owners for labor services, given the lack of deductibility of compensation from the VAT
  • Distributional and other issues associated with interests of fixed-income taxpayers in transitioning to a “goods-and-services” tax
  • Implications for state and local governments
  • Concerns about governmental growth and potential future increases in the VAT rate
  • Impact on the proposal described in the white paper of the base erosion and profit shifting (BEPS) project and other legislation that may be implemented by OECD countries in adopting the BEPS recommendations
  • Appropriate treatment of foreign shareholders of corporations that do business in the United States
  • Transition rules

KPMG observation

Last month, House Republicans released a "blueprint" for tax reform that proposes to reduce tax rates for businesses and individuals and to move the U.S. tax system closer to a consumption-based tax system through reforms of the income tax rules (without providing a VAT or national sales tax).  The blueprint was developed by Ways and Means Chairman Kevin Brady with input from the broader House Republican caucus. Read TaxNewsFlash-Legislative Update 

Rep. Renacci’s proposed SATS plan reflects an even more overt move to a consumption-based system with respect to business activity—it would completely eliminate the current corporate income tax and replace it with a credit-invoice VAT system.

The move towards a consumption-based system reflected in both the blueprint and the SATS plan underscores that House Republican tax-writers are looking at tax reform in a fundamentally different manner than as in the past. If Republicans continue to control the House next year, these approaches can be expected to be the new starting point for tax reform discussions, rather than the Tax Reform Act of 2014 proposed in a previous Congress by then-chair of the Ways and Means Committee, Dave Camp.

Moreover, it is worth noting that the SATS plan includes some features that may have bipartisan appeal. For example, the SATS plan would dedicate revenue from a one-time repatriation tax to the highway trust fund; it is described as similar to a VAT proposed by a Democratic senator (Sen. Cardin); it would expand the EITC and the standard deduction; and it would eliminate “distortions” resulting from the current rate differential between ordinary income and capital gain.  

Still, as the white paper indicates, there are many details that remain to be resolved. For example, because VAT regimes shift the tax from income to consumption, they are often considered to be less progressive in allocating the tax burden. Thus, it remains to be seen how much political and stakeholder support may emerge for the proposal.  Nonetheless, it could be a starting point for discussion and negotiation.

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