The House Budget Committee, chaired by Congressman Paul Ryan (R-WI), released its budget proposal today, and 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. reform is a significant component. On 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. side, Congressman Ryan would consolidate our current six brackets, taxed at rates from 10% to 35%, into two, taxed at 10% and 25%. He also would eliminate the Alternative Minimum Tax.
On 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. side, the Ryan budget reduces the top rate from 35% to 25% and shifts to a “territorial” tax system in which the U.S. would tax only income earned within its borders. (This would allow multinational corporations to bring home profits earned abroad without paying additional taxes.)
These tax cuts are paid for with base broadeningBase broadening is the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions, deductions, credits, and other preferences. Narrow tax bases are non-neutral, favoring one product or industry over another, and can undermine revenue stability. measures and the elimination of various deductions, credits, and loopholes. The plan is not specific about precisely what would be cut, but it does propose that the base broadening be of sufficient magnitude to be revenue neutral in the short term. Given the significant rate reductions and AMT elimination, it’s likely that this would require the elimination of most tax expenditures and a complete overhaul of the tax code.
The budget plan is here, and CBO’s analysis can be read here.
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