Tuesday, June 28, 2016
THE REPUBLICAN BLUEPRINT FOR TAX REFORM
As promised House Speaker Paul Ryan released a “blueprint for tax reform” last Friday, an installment in the Republican’s “Better Way” agenda.
The TAX FOUNDATION has published an overview of the “Details of the House GOP Tax Plan”. The full plan can be downloaded by clicking here.
According to the TAX FOUNDATION summary, the plan -
· Consolidates the current seven tax brackets into three, with rates of 12 percent, 25 percent, and 33 percent (see table at TAX FOUNDATION).
· Provides a 50 percent exclusion of capital gains, dividends, and interest income. This is equivalent to taxing capital gains, dividends, and interest income at half the rate of ordinary income: with three brackets of 6 percent, 12.5 percent, and 16.5 percent.
· Increases the standard deduction from $6,300 to $12,000 for singles, from $12,600 to $24,000 for married couples filing jointly, and from $9,300 to $18,000 for heads of household.
· Eliminates the personal exemption.
· Creates a $500 non-refundable credit for dependents who are not children.
· Increases the child tax credit to $1,500 per child, the first $1,000 of which is refundable, as under current law.
· Raises the phaseout threshold for the child tax credit for married households from $110,000 to $150,000.
· Eliminates all itemized deductions besides the mortgage interest deduction and the charitable contribution deduction.
· Taxes income derived from pass-through businesses at a maximum rate of 25 percent.
· Allows the cost of capital investment to be fully and immediately deductible.
The proposal also eliminates the dreaded Alternative Minimum Tax (AMT) and the Estate Tax and keeps intact the Earned Income Credit.
The text of the plan explains (highlights are mine) –
“This Blueprint will simplify the current array of tax benefits for families looking to make education more affordable for their children. The Committee on Ways and Means will work to simplify and consolidate the current-law provisions to provide a more effective and efficient package of higher education tax benefits that will cover both college and vocational training programs, including a savings incentive, such as 529 plans, and tax relief targeted at helping low- and middle-income families with the costs of higher education, such as the American Opportunity Tax Credit.”
“The Committee on Ways and Means will explore the creation of more general savings vehicles, using as a model the retirement accounts that have proven so successful. . . . This Blueprint will continue the current tax incentives for savings. The Committee on Ways and Means will work to consolidate and reform the multiple different retirement savings provisions in the current tax code to provide effective and efficient incentives for savings and investment.”
So the plan wants to consolidate the many current tax benefits for education and retirement savings, and is considering the idea of an IRA-like “Universal Savings Account”.
Concerning the surviving mortgage interest deduction –
“The Committee on Ways and Means will evaluate options for making the current-law mortgage provision a more effective and efficient incentive for helping families achieve the dream of homeownership.”
But (again, highlight is mine) –
“ . . .no existing mortgage will be affected by any changes in the tax code. Similarly, no changes will affect re-financings of existing mortgages”.
My thoughts –
(1) I obviously applaud the overall theme of simplifying the Tax Code.
(2) I like the ideas of a smaller number of tax brackets, an increased Standard Deduction/Personal Exemption combo, the return of the 50% capital gain deduction and its application to dividends and interest, a consolidating of the various retirement plans, the Universal Savings Account, and certainly the end of the dreaded Alternative Minimum Tax. I do not oppose the elimination of the Estate Tax, as long as we keep the “stepped-up basis” rules. I also like the elimination of the various Obamacare tax surtaxes and penalties, not specific to this blueprint but included in a previous “installment” of the Republican “Better Way” agenda.
(3) I could support the increased Child Tax Credit (CTC) and the lower non-child dependent credit as a replacement to the Personal Exemption for dependents, but oppose any AGI-based phase out of the CTC.
(4) I am not totally on board with the elimination of Itemized Deductions for state and local taxes (income, sales, and real estate), investment interest, and investment and job-related Miscellaneous Expenses. And what about the itemized deduction for gambling losses? Will net, and not gross, gambling income now be taxed on Page 1 of the Form 1040?
(5) I like that the deductions for Charitable Contributions and Mortgage Interest are maintained. But I would limit the mortgage interest deduction to acquisition (including home improvements) debt on the taxpayer’s principal personal residence only – eliminating the deduction for home equity interest and interest on a second personal residence.
(6) I continue to oppose the use of the Tax Code to distribute federal welfare and social benefit programs like the Earned Income Credit, the refundable Child Tax Credit, and the education tax benefits. The benefits themselves should not be eliminated – they just should not be delivered via the 1040.
(7) I also continue to have concerns about a “post-card” tax return, but it might be less objectionable with a much simpler Tax Code.
(8) I also have concerns about the reduced top tax rate on pass-through business income from partnerships and sub-S corporations. The pass-through of business income to general partners is basically the equivalent of Schedule C income and should be taxed as Schedule C income is taxed. The pass-through of all income to limited partners and the pass-thru of sub-S corporation income to shareholders are basically dividends and should be taxed as dividends are taxed.
(9) I believe that corporations should be taxed on net book income, without any special industry-specific tax benefits, and that there should be a “dividends-paid” tax deduction. I also still support the elimination of the depreciation deduction on real property (buildings) for all business activities (including rental). I could support an expanded “Section 179” deduction.
I clearly support the Republican Party, and strongly oppose the Democratic Party, take on tax reform, as well as the recently announced Republican idea for replacing Obamacare. I tend to support the Republican Party’s domestic plans, except for the religious-right influenced anti-abortion and same-sex marriage ban policies, and the Democratic Party’s world view and foreign policy.
So – what do you think of the Republican’s “blueprint for tax return”?