U.S. corporations would get the largest federal income-tax rate cut in history, and their foreign earnings would no longer face domestic taxes when they return to the U.S. under a plan that House Republicans unveiled Friday.
The changes would remove incentives for U.S. companies to seek offshore tax addresses for lower tax bills, said Representative Kevin Brady, the chairman of the tax-writing House Ways and Means Committee. “America will leapfrog from dead last” among developed economies in terms of business-friendly tax policy, “to the lead pack,” said Brady, a Texas Republican.
Many business owners, including those who receive income from partnerships, would also pay far lower rates on their earnings. And investors would receive a cut of 30 percent or more in the rate they pay on gains.
The Republican tax-overhaul blueprint, a goal of House Speaker Paul Ryan of Wisconsin, also offers rate cuts on individuals’ regular income by consolidating the seven existing tax brackets to three. The top bracket’s rate would be 33 percent, down from 39.6 currently. And a near-doubling of the standard deduction would be a boon for middle-class taxpayers.
The plan contains some familiar Republican goals: abolishing the estate tax, which applies to estates worth more than $5,450,000; simplifying most taxpayers’ returns down to the size of a postcard; and streamlining the Internal Revenue Service.
“Once again, Republicans are planning to hand massive tax giveaways to millionaires and billionaires on the backs of hard-working American families,” House Minority Leader Nancy Pelosi of California said in a statement released by her office. She questioned the plan’s cost and said it “takes us further from restoring fairness to our tax code.”
Under the plan, part of a six-volume election-year policy agenda that House Republicans have rolled out this month, the statutory corporate income-tax rate would drop to 20 percent from 35 percent. It would be “the largest corporate tax cut in U.S. history,” according to a written description of the plan.
For Ryan, who was elected speaker in October after serving as chairman of the tax-writing Ways and Means Committee, the plan represents a path toward a long-sought goal: comprehensive tax reform. Yet with a presidential election under way -- and the Republicans’ continued control of the U.S. Senate next year in question -- that path remains difficult.
While Brady said the 35-page tax blueprint is designed to be revenue-neutral, it provides no detail on how much the various proposals would cost. Tax cuts would be paid for by eliminating various deductions, exemptions and credits for individuals and businesses, according to the document, but they aren’t specified. However, for individuals, the plan would retain deductions for home mortgage interest and charitable contributions; and companies would still be eligible for research and development tax credits.
The proposal assumes its tax cuts would spur economic growth that would help make up a revenue shortfall. House Republican leaders haven’t yet developed an estimate for how much growth would result, according to aides who described the plan before its release and asked that their names not be used.
Eliminating some deductions will broaden the tax base, but with the rate cuts, the business-related benefits and the elimination of the estate tax, “I’m quite certain this will score as way short of revenue neutral,” said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities and former chief economist for Vice President Joe Biden.
“There’s an attempt here to shift the tax burden more to compensation and away from investment income,” Bernstein said. “That’s regressive, and by hurting those who depend on paychecks as opposed to stock portfolios, will exacerbate after-tax inequality.”
The lower corporate tax rate would be combined with a new “destination basis” for cross-border transactions: Products and services that are exported outside the U.S. would no longer be taxed -- while any products and services that are imported would be. “This will eliminate the incentives created by our current tax system to move or locate operations outside the United States,” the blueprint document says. “It also will allow U.S. products, services and intangibles to compete on a more equal footing in both the U.S. market and the global market.”
Since 2012, more than 20 U.S. companies have shifted their tax addresses offshore by merging with foreign counterparts in corporate inversions -- a move designed to take advantage of other countries’ lower corporate taxes. The 35 percent statutory rate in the U.S. is the highest among developed economies; the average such rate is 24.8 percent.
The proposal would also encourage U.S. companies to return more than $2 trillion in earnings they’ve kept offshore to avoid the 35 percent corporate tax rate. Cash or other liquid equivalents stashed abroad would be taxed at just 8.75 percent; other assets at 3.5 percent. Companies would have eight years to pay those taxes. Going forward, companies wouldn’t be taxed on dividends paid to them by their foreign subsidiaries.
The goal, according to Ryan: “Stop taxing people when they bring their money into our country -- so they’ll bring more.”
Businesses would also be allowed to deduct the entire cost of a capital investment during the same year of the purchase -- a process that can be drawn out over years under current law. The proposal would apply to purchases of tangible assets such as buildings or equipment and intangible assets such as intellectual property. At the same time, businesses would no longer be allowed to deduct net interest payments, except to offset taxes on their interest income.
In a move that would help many hedge funds as well as many small businesses, the plan would cap the tax rate for so-called “pass-through” income at 25 percent. Businesses organized as partnerships, sole proprietorships and limited liability companies don’t pay taxes themselves, but pass taxable income through to their individual owners, who pay taxes on it based on their tax bracket. For those in the highest bracket, an investment surtax and limitations on their deductions push their “real” tax rate as high as 44.6 percent, Ryan has said.
For individuals, the plan sets up a new effective top tax rate of 16.5 percent on net capital gains, dividends and interest income. Currently, long-term capital gains are taxed at a top rate of 23.8 percent.
Larger standard deductions of $24,000 for married couples, $18,000 for single filers with children and $12,000 for single filers -- up from $12,600, $9,300 and $6,300 respectively -- would mean breaks for lower- and middle-income taxpayers. In 2011, almost two-thirds of taxpayers claimed standard deductions -- and of that number, more than 90 percent reported adjusted gross incomes of less than $75,000. The increased deductions ensure that no one in the lowest tax bracket currently would pay more, according to the plan.
The blueprint also envisions repeal of the alternative minimum tax for companies and individuals and the repeal of the Affordable Care Act -- with its 3.8 percent surtax on net investment income for high-income individuals and 0.9 percent payroll tax increase.
As part of the plan, Republicans would overhaul the IRS to focus it more on customer service and create a “small claims court” to decide minor disputes quickly. “The IRS needs to get its act together,” Ryan said.
Brady said Republicans will seek public input on how to strengthen the plan. “Tax reform only happens once a generation -- and it can be too easily hijacked” by special interests, he said. Said Majority Whip Steve Scalise of Louisiana: “Ultimately, the American people are going to make this decision in November.”