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Tuesday October 21, 2014

Washington News

Washington Hotline

Chairman Camp's Tax Simplification Proposal

On February 26, House Ways and Means Chairman Dave Camp (R-MI) published a 979 page discussion draft on tax reform. The draft of the "Tax Reform Act of 2014" is a comprehensive overview of proposed reforms for individual taxes, capital gains taxes and business taxes. There was no significant change in gift or estate tax rules.

Chairman Camp stated that there were three major goals for the Tax Reform Act of 2014. First, the seven current tax brackets would be changed to a 10% and 25% bracket. Second, a large increase in the standard deduction and child tax credit would simplify filing for most Americans. Third, with the two tax brackets and the large increase in the standard deduction, 95% of Americans would not itemize their deductions.

While 979 pages is an extensive discussion draft, the estimate of the Joint Committee on Taxation (JCT) is that the 70,000 page Internal Revenue Tax Code would be reduced by 25% under the bill. This would represent the greatest level of tax simplification in the past 25 years.

According to JCT, there are four major potential benefits of this tax reform bill.

1. Employment – 1.8 million new jobs will be created over the next decade.

2. Growing Economy – The new employment and increased hiring by American companies will lead to $3.4 trillion in additional economic growth.

3. Average Family Income – With the growth in employment and the economy, there will be a net benefit per family of $1,300 per year.

4. Increased Charitable Giving – The growth of the economy will lead to greater gifts that could amount to $2.2 billion per year.

At a press conference, Camp stated, "The last time we reformed the tax code was 1986. That was 28 years ago – and America, once the beacon for investment, hiring and strong wages, is now falling behind – and it risks falling even further behind unless we take action. The time to act is now. America cannot afford to wait."

The Ranking Member of the House Ways and Means Committee is Rep. Sander Levin (D-MI). He observed, "It is vital that tax reform encourage economic growth, support working families, broaden the middle class, and address income inequality. It must produce a fairer and more adequate tax code for all Americans."

The Senate taxwriters are Senate Finance Committee Chairman Ron Wyden (D-OR) and Ranking Member Orrin Hatch (R-UT). They issued a joint press release and stated, "Today, Dave Camp put out a comprehensive vision to remake our tax code. While we look forward to reviewing this proposal, there can be no doubt that Mr. Camp deserves credit for working hard on these vital issues."

Editor's Note: The release of a comprehensive discussion draft on tax reform is a major step in this process. While there are many additional steps to follow, members of both parties recognize the potential economic benefit to the nation. As is true with all tax reform efforts, there will be over 100 organizations that now undertake a major effort to protect a specific credit or deduction. Given the inevitable political controversy of major tax reform, it is probable that actual votes by Congress will not occur until after the fall election. While a final bill is one to three years into the future, the Camp bill will be the starting point for an eventual tax act. Many of his tax reform principles could be incorporated in a final bill.

Proposed Tax Reform Overview


The proposed Tax Reform Act of 2014 includes major changes for both individual and business taxes.

Individual Taxation Changes


1. Brackets – The existing 7 brackets from 10% to 39.6% are reduced to three brackets of 10%, 25% and 35%. Income over $35,600 for an individual or $71,200 for a couple will be taxed at 25%. The 35% bracket will apply to modified adjusted gross income (MAGI) over $400,000 for individuals or $450,000 for couples.

2. Standard Deduction – The standard deduction is nearly doubled to $11,000 for an individual and $22,000 for a couple.

3. Child Credit – The child credit is increased to $1,500 per qualifying child.

4. Phase-outs – Individuals with incomes over $250,000 or couples with incomes over $300,000 will have phase-outs of the 10% bracket benefit, the standard deduction and the child credit.

5. Repealed Items – The extensive repeal list includes the personal exemption, the Pease itemized deduction limits, the alternative minimum tax (AMT), the state and local tax deduction, the real estate tax deduction, most energy credits, medical expense deductions, moving expense deductions and mortgage interest for loans over $500,000.

6. Capital Gains and Dividends – These are taxed at ordinary rates with a 40% exclusion. Sale of a major asset will be taxed at 35% less the 40% exclusion, producing a 21% tax rate. Adding the 3.8% Medicare tax produces a 24.8% rate. The various phase-outs could increase this to approximately a 26% federal rate.

Business Taxation Changes


While the individual tax changes are projected to lose federal tax revenue, the net effect of the business changes is to recover that loss. The proposed Tax Reform Act of 2014 includes six major business tax changes.

1. Corporate Rate – The reform proposes lowering the top corporate rate from 35% to 25%.

2. Depreciation – The modified accelerated cost recovery system (MACRS) will be lengthened to a system similar to the alternative depreciation system (ADS).

3. Manufacturing – If a manufacturing entity is a passthrough, then the top 35% individual rate is reduced to 25%.

4. Foreign Operations – In a fairly complex series of provisions, the current $1 trillion plus of accumulated overseas corporate earnings would be subject to a tax of 8.75%. Future earnings overseas will be subject to a 95% exclusion with a system that generally follows territorial tax principles.

5. Energy – Many oil industry and green energy deductions and credits are repealed.

6. Expensing – Small businesses will be permitted to expense $250,000 of equipment each year.

Published February 28, 2014


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