Quicker Write-Offs
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.
Capital Gains
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.”