This morning, the office of House Speaker Paul Ryan released a blueprint for tax reform that would overhaul major components of the U.S. tax code and lower taxes for households and businesses. The key details of the plan are listed below:
Individual Income Tax Changes
- Consolidates the current seven tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. into three, with rates of 12 percent, 25 percent, and 33 percent (see table below).
- Provides a 50 percent deduction of capital gains, dividends, and interest income. This is equivalent to taxing capital gains, dividends, and interest income at half the marginal rates of ordinary income: with three brackets of 6 percent, 12.5 percent, and 16.5 percent.
- Increases the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. from $6,300 to $12,000 for singles, from $12,600 to $24,000 for married couples filing jointly, and from $9,300 to $18,000 for heads of household.
- Eliminates the personal exemption.
- Creates a $500 non-refundable credit for dependents who are not children.
- Increases the child 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. to $1,500 per child, the first $1,000 of which is refundable, as under current law.
- Raises the phaseout threshold for the child 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. credit for married households from $110,000 to $150,000.
- Eliminates all itemized deductions besides 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. and the charitable contribution deduction.
- Eliminates the individual alternative minimum tax.
| Note: Dollar thresholds refer to dollars of taxable income. This table assumes that the 12% bracket replaces the existing 10% and 15% brackets, the 25% bracket replaces the 25% and 28% brackets, and the 33% bracket replaces the 33%, 35%, and 39.6% brackets. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ordinary income | Capital gains, dividends, and interest | Single filers | Married joint filers | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
12% |
6% |
$0 to $37,650 |
$0 to $75,300 |
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|
25% |
12.5% |
$37,650 to $190,150 |
$75,300 to $231,450 |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
33% |
16.5% |
$190,150+ |
$231,450+ |
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Business Income Tax Changes
- Reduces the 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 from 35 percent to 20 percent.
- Eliminates the corporate alternative minimum tax.
- Taxes income derived from pass-through businesses at a maximum rate of 25 percent.
- Allows the cost of capital investment to be fully and immediately deductible.
- Eliminates the deductibility of net interest expenses.
- Allows net operating losses to be carried forward indefinitely, and increased by a factor reflecting inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. and the real return to capital.
- Does not allow net operating losses to be carried back.
- Restricts the deduction for net operating losses to 90 percent of net 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. .
- Preserves the last-in, first-out method of accounting.
- Eliminates the domestic production activities deduction (section 199).
- Creates a fully territorial tax systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. , exempting 100 percent of dividends from foreign subsidiaries from U.S. tax.
- Enacts a deemed repatriationTax repatriation is the process by which multinational companies bring overseas earnings back to the home country. Prior to the 2017 Tax Cuts and Jobs Act (TCJA), the U.S. tax code created major disincentives for U.S. companies to repatriate their earnings. Changes from the TCJA eliminate these disincentives. of currently deferred foreign profits, at a tax rate of 8.75 percent for cash and cash-equivalent profits and 3.5 percent on other profits.
- Modifies all business income taxes to be border-adjustable. This means that businesses are taxed on their imports but are not subject to tax on their exports.
Other
- Eliminates the 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. .
- Reorganizes the Internal Revenue Service and alters certain tax administration rules.
The full House GOP tax reform plan can be found here.
(Edited to reflect that capital gains, dividends, and interest would be taxed at half the marginal rates of ordinary incone, not necessarily the effective rates, under the GOP plan.)
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