Legislative update: Tax reform “blueprint” released by House Republicans

Tax reform “blueprint” of U.S. House Republicans

House Republicans today released their "blueprint" for tax reform. The blueprint proposes to reduce tax rates for businesses and for 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 value added tax (VAT) or national sales tax).

Related content

Today’s tax reform blueprint is the latest of six proposals released as part of House Speaker Paul Ryan's “A Better Way” initiative. Read the "blueprint" tax policy paper [PDF 3 MB] and a "snapshot" [PDF 77 KB] for tax reform.

The tax reform blueprint was developed by Ways and Means Chairman Kevin Brady with input from the broader House Republican caucus. While this blueprint document is not a legislative draft that can be acted on by the House, Brady's objective is to provide a new approach to the tax reform discussions as begun in 2011 under the then-Chairman of Ways and Means, Dave Camp. 

KPMG LLP will provide additional analysis and observations about this tax reform blueprint in the coming days.  

High level overview of proposed changes

The blueprint proposes dramatic changes to the taxation of individuals and businesses, as well as to the structure and administration of the IRS.  Some of the key proposed changes are summarized below.

Individuals

The blueprint proposes changes to the taxation of individuals, such as to:   

  • Replace the current seven different regular tax brackets for individuals with three brackets, each indexed for inflation—12%, 25%, and 33%
  • Limit the tax rate applicable to “active business income” from sole proprietorships and passthough entities to 25% (except to the extent of an owner-operator’s “reasonable compensation” for services, which would be subject to the graduated rate structure, above)
  • Eliminate the individual alternative minimum tax (AMT)
  • Eliminate the estate and generation skipping transfer taxes
  • Allow individuals to deduct half of their net capital gains, dividends, and interest income (leading to basic rates of 6%, 12.5%, and 16.5% on such income depending on the applicable rate bracket)
  • Consolidate the current standard deduction, additional standard deduction, personal exemption for a taxpayer and spouse, personal exemption for children and dependents, and child tax credit into two benefits—a larger standard deduction and an enhanced child and dependent tax credit
  • “Work to” simplify and consolidate current tax benefits relating to education
  • Eliminate all itemized deductions except the mortgage interest deduction and the charitable contribution deduction (although Ways and Means will evaluate options for making both these deductions more efficient and effective)
  • Eliminate various unspecified exemptions, deductions, and credits for individuals

The blueprint also explains that a separate task force on health care addressed the exclusion for employer-provided health insurance; this report proposed to cap the exclusion at an unspecified level that would affect only the “most generous” plans and would ensure job-based coverage continues unchanged for the vast majority of health insurance plans. Read TaxNewsFlash-Legislative Update  

In addition, the blueprint indicates that, while it continues existing tax incentives for retirement savings, the Ways and Means Committee will examine those incentives in developing options for an overall approach to retirement savings and will explore the creation of more general savings vehicles and the consolidation and reform of the multiple exiting incentives for savings and investment.

Businesses, in general

The blueprint proposes changes to the taxation of businesses, including proposals to:

  • Lower the C corporation tax rate to a flat rate of 20%
  • Repeal the corporate AMT
  • Allow businesses to fully and immediately expense the cost of investments in tangible property (such as equipment and buildings) and intangible assets (such as intellectual property), but not land
  • Allow businesses to deduct interest expenses against interest income, with any net interest expense not being deductible but being carried forward indefinitely to use against future net interest income (and with Ways and Means working to develop special rules for financial services companies that take into account the role of interest income and expense in their business models)
  • Allow net operating losses (NOLs) to be carried forward indefinitely and to be increased by an interest factor that compensates for inflation and a real return on capital—NOLs would not be allowed to be carried back and the deduction with respect to NOL carryforwards would be limited to 90% of the net taxable amount for the year, determined without regard to the carryforward
  • Eliminate various “special-interest deductions and credits” that are designed to encourage particular business activities (such as the section 199 domestic manufacturing deduction and other unspecified incentives)
  • Treat sole proprietorships and passthrough entities as paying deductible “reasonable compensation” to their owner-operators 

The blueprint also indicates that, while it preserves the last-in-first-out (LIFO) method of accounting and a credit to encourage research and development (R&D), Ways and Means will continue to evaluate options for making both the treatment of inventory and the R&D credit more effective and efficient in the context of the blueprint’s tax system.

Businesses with international operations

In general, the blueprint proposes to move to a “destination-basis” territorial tax system that follows consumption, rather than the location of product, by providing border adjustments exempting exports and taxing imports.  More specifically, the blueprint proposes the following:

  • Provide a 100% exemption for dividends from foreign subsidiaries
  • Tax existing accumulated foreign earnings at 8.75% to the extent held in cash or cash equivalents, or at 3.5% otherwise, with companies able to pay the resulting tax liability over eight years
  • Repeal the bulk of the “subpart F” rules, although the “foreign personal holding company rules” would be retained

Change the structure of the IRS

The blueprint proposes to restructure the IRS into three major units (families and individuals, businesses, and an “independent small claims court” unit), each of which would be committed to “service first” and would be accountable to a “taxpayer bill of rights.”  

The IRS would be headed by a new “administrator” appointed by the president, with the advice and consent of the Senate.  The administrator would have a three-year term, with the president only being allowed to reappoint an administrator once.

Transition rules

The blueprint indicates that Ways and Means would craft clear rules to serve as an appropriate bridge from the current tax system to the new tax system, with particular attention given to comments received by stakeholders.

Revenue and distribution

The blueprint indicates that it “envisions tax reform that is revenue neutral.”  In this regard, it notes that:

  • House Republicans measure revenue neutrality by reference to a “current policy baseline” that assumes that Congress will extend tax incentives currently scheduled to expire.
  • House Republicans achieve revenue neutrality in part by including the positive revenue effects from the economic growth that would result from a more pro-growth tax code.
  • The blueprint assumes that tax increases enacted as part of “Obamacare” (such as the net investment income tax, the additional 0.9% payroll tax, the medical device tax, and the health insurance tax) will be repealed as part of the proposal set forth by the separate health tax force and should be paid for by repealing “Obamacare,” without new taxes to replace them.

The blueprint also indicates that it “will deliver a new tax system under which no income group will see an increase in its Federal tax burden.”

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