Republicans plan ambitious 'revenue neutral' tax overhaul
The plan is to make tax more simple and to lower corporate tax rates, but it's unclear who will pay more
Congressional Republicans are planning a massive overhaul of the nation's tax system, a heavy political lift that could ultimately affect families at every income level and businesses of every size.
Their goal is to simplify a complicated tax code that rewards wealthy people with smart accountants, and corporations that can easily shift profits — and jobs — overseas. It won't be easy. The last time it was done was 30 years ago.
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The overhaul would include a shift toward a consumption tax, which could affect the cost of imports, including imports from Canada.
Senate Majority Leader Mitch McConnell and Speaker Paul Ryan have vowed to pass a tax package in 2017 that would not add to the budget deficit. The Washington term is "revenue neutral."
It means that for every tax cut there has to be a tax increase, creating winners and losers. Lawmakers would get some leeway if non-partisan congressional analysts project that a tax cut would increase economic growth, raising revenue without increasing taxes.
A tough political process
Nevertheless, passing a massive tax package will require some tough votes, politically.
Some key Republican senators want to share the political risk with Democrats. They argue that a tax overhaul must be bipartisan to be fully embraced by the public. They cite President Barack Obama's health law — which passed in 2010 without any Republican votes — as a major policy initiative that remains divisive.
Congressional Democrats say they are eager to have a say in overhauling the tax code. But McConnell, who faulted Democrats for acting unilaterally on health care, is laying the groundwork to pass a purely partisan bill.
Both McConnell and Ryan said they plan to use a legislative manoeuvre that would prevent Senate Democrats from using the filibuster to block a tax bill.
First, repeal Obama's health law
McConnell says he wants the Senate to tackle a tax plan in the spring, after Congress repeals Obama's health law. House Republicans are more eager to get started, but haven't set a timeline.
Some things to know about Republican efforts to overhaul the tax code:
House Republicans have released the outline of a tax plan that would lower the top individual income tax rate from 39.6 per cent to 33 per cent, and reduce the number of tax brackets from seven to three. The gist of the plan is to lower tax rates for just about everyone, and make up the lost revenue by scaling back exemptions, deductions and credits.
The plan, however, retains some of the most popular tax breaks, including those for paying a mortgage, going to college, making charitable contributions and having children.
The standard deduction would be increased, giving taxpayers less incentive to itemize their deductions.
Who will benefit?
The non-partisan Tax Policy Center says the plan would reduce revenues by $3 trillion over the first decade, with most of the savings going to the highest-income households.
That's not revenue neutral.
Small business owners would get a special top tax rate of 25 per cent.
Investment income would be taxed like wages, but investors would only have to pay taxes on half of this income.
Senate Republicans have yet to coalesce around a comprehensive plan, or even an outline.
Trump's plan has fewer details. He promises a tax cut for every income level, with more low-income families paying no income tax at all.
Who will pay more?
The Tax Policy Center says Trump's plan would reduce revenues by a whopping $9.5 trillion over the first decade, with most of the tax benefits going to the wealthiest taxpayers. Trump has disputed the analysis.
Like the House plan, Trump would reduce the top income tax rate for individuals to 33 per cent, and he would reduce the number of tax brackets to three. He would also increase the standard deduction.
Trump has embraced two ideas championed by Obama but repeatedly rejected by Republicans over the past eight years. Trump's plan would cap itemized deductions for married couples making more than $200,000 a year. It would also tax carried interest, which are fees charged by investment fund managers, as regular income instead of capital gains.
Revamping corporate taxes
The top corporate income tax rate in the U.S. is 35 per cent, the highest in the industrialized world. However, the tax is riddled with so many exemptions, deductions and credits that most corporations pay much less.
Both Trump and House Republicans want to lower the rate, and pay for it by scaling back tax breaks.
Trump wants to lower the corporate tax rate to 15 per cent. Ryan says 20 per cent is more realistic, to avoid increasing the budget deficit.
This is one of the most controversial parts of the House Republicans' tax plan. It is also key to making it work.
Under current law, the United States taxes the profits of U.S.-based companies, even if the money is made overseas. However, taxes on foreign income are deferred until a company either reinvests the profits in the U.S. or distributes them to shareholders.
Shift to a consumption tax
Critics say the system encourages U.S.-based corporations to invest profits overseas or, more dramatically, to shift operations and jobs abroad to avoid U.S. taxes.
House Republicans want to scrap America's worldwide tax system and replace it with a tax that is based on where a firm's products are consumed, rather than where they are produced.
Under the system, American companies that produce and sell their products in the U.S. would pay the new 20 per cent corporate tax rate on profits from these sales. However, if a company exports a product abroad, the profits from that sale would not be taxed by the U.S.
There's more: Foreign companies that import goods to the U.S. would have to pay the tax, increasing the cost of imports.
Exporters love the idea. But importers, including big retailers and consumer electronics firms, say it could lead to steep price increases on consumer goods. The lobbying has already begun.