Comparing Congressional Tax Reform Proposals

5 min readBy: Scott Greenberg, Emily Potosky

It has been more than 30 years since the last major overhaul of the U.S. federal taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code – the Tax Reform Act of 1986 – and many lawmakers are getting restless. Over the past few years, several members of Congress have drafted original proposals for reforming the U.S. tax code, ranging from six-page white papers to 980-page bills.

These plans reflect a widespread, bipartisan consensus that the U.S. tax system is overly complex, inefficient, and uncompetitive. While none of the proposals is likely to become federal law any time soon, their importance should not be understated. For instance, the Tax Reform Act of 1986 was crafted out of several detailed tax reform plans that had been circulating through Congress, beginning in 1982.

Now, many lawmakers have set their sights on the 2017 legislative session as an opportunity to pass a large-scale overhaul of the U.S. tax code. To get a sense of where tax policy might be headed next year and beyond, it is useful to compare five comprehensive tax reform proposals that have been offered by members of Congress over the past few years:

To help policymakers and voters compare these plans, we’ve developed an interactive tool that summarizes the major provisions in each proposal.

INTERACTIVE TOOL

Compare Congressional Tax Proposals

Select up to five Congressional tax proposals and see how they approach different issues relating to tax policy.

In the table, we sort the provisions in each plan into twelve categories, each concerning a different part of the federal tax code. While these categories cannot encapsulate the full complexity of each proposal, they should be a good start for understanding how the plans differ on major questions of tax policy:

  1. Rates on Ordinary Income: There are currently seven tax brackets for ordinary income earned by individuals, at rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Adjusting these brackets and rates is one way to increase or decrease the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. burden on different segments of the population.
  2. Itemized Deductions: The tax code contains dozens of itemized deductions that households can apply to lower their taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. . These deductions range from the mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. to the deduction for state and local tax payments. Itemized deductions are often cited as a source of complexity in the tax code.
  3. Credits: While deductions lower a household’s taxable income, credits lower its overall tax burden. Among the dozens of credits in the tax code, the Earned Income Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. and the Child Tax Credit are two of the most well-known. Many tax credits are designed to benefit low-income Americans.
  4. Alternative Minimum Tax: The alternative minimum tax was enacted in 1982, to increase the tax burden of households that make extensive use of tax deductions and credits. It is usually considered one of the most complex portions of the individual tax code.
  5. Rates on Capital Gains and Dividends: Income from capital gains and dividends is taxed at lower rates than other income, with a top rate of 23.8%. Some see these rates as preferential treatment for the wealthy, while others see them as a measure to prevent the double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. of investment income.
  6. Corporate Income TaxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. Rate: Corporations also pay income taxes, at rates up to 35%. Although the U.S. corporate income tax rate is the highest in the industrialized world, corporate taxes make up a relatively small share of federal revenue.
  7. Treatment of Capital Investment: Businesses that invest in new capital (such as machines, buildings, or equipment) are not able to deduct these costs as they occur. Instead, they are required to spread out the deductions over time. The length of time a business needs to write off investment has a significant impact on its cost. In recent years, Congress has temporarily allowed businesses to deduct, or “expense,” 50% of investment costs in the year they occur. Some have called for this provision to expire, while others have called for it to be expanded, to allow businesses to fully expense all capital investments.
  8. Treatment of International Income: The United States is one of the few countries with a worldwide tax systemA worldwide tax system for corporations, as opposed to a territorial tax system, includes foreign-earned income in the domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. , where businesses pay taxes on income earned overseas. However, businesses are often able to defer paying taxes on international income, until they return the income to the United States. Most other countries have “territorial” tax systems, in which corporations’ foreign income is exempt from domestic taxation.
  9. Treatment of Pass-through BusinessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. Income: The majority of American businesses are not subject to the corporate income tax. Businesses such as partnerships, sole proprietorships, and S corporations now account for more than half of all business income and employ more than half of the private sector workforce. These entities are known as pass-through businesses, because their profits are passed directly to the businesses’ owners and are taxed on the owners’ individual income tax returns, not through the corporate income tax.
  10. Payroll Taxes: In addition to income taxes, individuals face two payroll taxes, which are taken directly from paychecks and are used to partially fund Social Security and Medicare. The Social Security payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. only applies to the first $118,500 of wages, while the Medicare payroll tax applies to all wages. These taxes comprise a significant portion of most Americans’ tax bills.
  11. Estate TaxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. : The estate tax is levied on the net value of property owned by deceased persons on the date of their death. Currently, estates are taxed a rate of 40% on assets over $5 million. As a result, the estate tax raises relatively little revenue and is difficult to collect.
  12. Other Taxes: This category includes major aspects of the tax code that don’t fit neatly into the other eleven categories, as well as any new taxes that candidates propose (such as value-added taxes).

We hope to update this table as more members of Congress offer comprehensive tax reform proposals in the upcoming months and years. If you have any thoughts about how to improve this table, shoot us an email at greenberg@taxfoundation.org.

(To see a similar chart, comparing the tax reform plans offered by the 2016 presidential candidates, click here).

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