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Tax Reform in the 114th Congress: An Overview of Proposals

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Tax Reform in the 113th114th Congress: An Overview of Proposals Molly F. Sherlock Specialist in Public Finance March 24, 2014Coordinator of Division Research and Specialist Mark P. Keightley Specialist in Economics July 9, 2015 Congressional Research Service 7-5700 www.crs.gov R43060 Tax Reform in the 113th114th Congress: An Overview of Proposals Summary Many agree that the U.S. tax system is in need of substantial reforms. The 113th Congress reform. Congress continues to explore ways to make the U.S. tax system simpler, fairer, and more efficient. Identifying and enacting policies that will result in a simpler, fairer, and more efficient tax system remains a challenge. On February 26, 2014, House Ways and Means Committee Chairman Dave Camp releasedDecember 10, 2014, the Chairman of the House Committee on Ways and Means introduced a comprehensive tax reform discussion draftproposal, the Tax Reform Act of 2014. This draft proposes (H.R. 1). The bill proposed substantial changes to both the individual and corporate income tax systems, reducing statutory tax rates for many taxpayers, while repealing dozens of credits, deductions, and other tax preferences. The Tax Reform Act of 2014 builds on previously released discussion drafts related to international tax, financial products, and small business. Earlier in the 113th Congress, former Senate Finance Committee Chairman Max Baucus released several tax reform discussion drafts, addressing international tax, cost recovery, tax administration, and energy tax policy. Other legislation has been introduced in the 113th Congress that would fundamentally change the U.S. federal tax system. The Fair Tax Act of 2013 (H.R. 25/S. 122) would replace most current federal taxes with a 23% national retail sales tax. Other proposals would establish a flat tax, where individuals would be taxed on wages and businesses taxed on cash flows (see the Flat Tax Act (H.R. 1040) and the Simplified, Manageable, And Responsible Tax (SMART) Act (S. 173)). The Tax Code Termination Act (H.R. 352) would effectively repeal the current Internal Revenue Code, requiring Congress to write a new tax code that would achieve certain stated objectives. Both the House- and Senate-passed budget resolutions (H.Con.Res. 25 and S.Con.Res. 8) call for substantial changes in current tax law. The House-passed proposal supports revenue-neutral comprehensive tax reform, while the Senate-passed proposal instructs the Finance Committee to draft revenue legislation that would reduce the deficit by $975 billion over the 2013 to 2023 budget window. The Bipartisan Budget Act of 2013 did not include general instructions related to tax reform, although the budget did include several deficit-neutral reserve funds for Senate budget enforcement. The President’s FY2015 budget proposal also contains substantive changes to current revenue policiesWhile no further action was taken on H.R. 1 in the 113th Congress, the proposal continues to inform the ongoing tax reform debate. There are various policy options for achieving comprehensive tax reform. One option is a basebroadening, rate-reducing tax reform, in the spirit of the Tax Reform Act of 2014. An alternative approach would be to substantially revise or eliminate the current tax system, instead relying on an alternative tax base for revenues. Tax reform legislation introduced early in the 114th Congress has tended to take the latter approach, proposing a retail sales tax at the federal level or a flat tax. Similar proposals were introduced in the 112th and 113th Congresses, and did not advance. Both Congress and the Administration have indicated interest in tax reform through their respective budget processes. The budget resolution for FY2016 (S.Con.Res. 11) communicates congressional support for action on tax reform. The President’s FY2016 budget proposes a number of tax policy changes, including substantial changes in the international tax system. The prevailing framework for evaluating tax policy considers equity (or fairness), efficiency, and simplicity. Equity examines the distribution of the tax burden across different groups. This information can then be used to assess the “fairness” of the tax system. A tax system that is economically efficient generally provides neutral treatment, minimizing economic distortions and maximizing output. A tax system that is simple reduces administrative and compliance costs while also promoting transparency. Oftentimes, there are trade-offs to be considered when evaluating tax policy options. For example, shifting towards a consumption tax might enhance economic efficiency. However, taxing consumption rather than income tends to put an increased tax burden on lower-income taxpayers relative to higher-income taxpayers, reducing the progressivity of the tax system. Policy makersPolicymakers may want to consider the trade-off between equity and efficiency when evaluating tax policy options. Congressional Research Service Tax Reform in the 113th114th Congress: An Overview of Proposals Contents Introduction...................................................................................................................................... 1 Tax Reform Options......................................................................................................................... 21 Income Tax Reform: Base-Broadening ..................................................................................... 2 A New Tax or Revised Tax Base ............................................................................................... 4 Framework for Evaluation ............................................................................................................... 5 Equity ........................................................................................................................................ 5 Efficiency .................................................................................................................................. 6 Simplicity .................................................................................................................................. 6 Tax Reform in the 113th114th Congress.................................................................................................... 6 Committee on Ways and Means and Committee on Finance Finance ............................................................................................................... 76 Legislative Proposals ................................................................................................................. 97 Reform the Income Tax System .......................................................................................... 97 Replace the Income Tax System.......................................................................................... 8 10 Other Tax Reform Legislative Proposals ........................................................................................ 13 Other Major Fiscal Reform..... 10 Fiscal Reform in Budget Proposals ......................................................................................... 11 Budget Resolution for FY2016 ........... 14 House and Senate Budget Resolutions .............................................................................. 1411 President’s FY2015FY2016 Budget Proposal ................................................................................ 1512 Tax Reform in the 112th113th Congress.................................................................................................. 16 Legislative Proposals ....................................13 Committee on Ways and Means and Committee on Finance .................................................. 13 Legislative Proposals ......................... 16 Reform the Income Tax System ........................................................................................ 16 Replace 15 Reform the Income Tax System ........................................................................................ 17 Other Tax Reform Legislative Proposals 15 Replace the Income Tax System.......................................................................... 18 Other Major Fiscal Reform Proposals ............................ 16 Other Tax Reform Proposals ....................................................................... 19 House Budget Resolution and the Path to Prosperity...................... 17 Fiscal Reform in Budget Proposals .................................. 19 President’s Budget ....................................................... 18 House and Senate Budget Resolutions ...................................................... 19 Other Major Proposals ........................ 18 President’s FY2015 Budget Proposal ................................................................................ 19 Concluding Remarks ..................................................................................................................... 20 Contacts Author Contact Information........................................................................................................... 2120 Acknowledgments ......................................................................................................................... 2120 Congressional Research Service Tax Reform in the 113th114th Congress: An Overview of Proposals Introduction Several tax reform proposals have been put forward in the 113th Congress, and Members of Congress continue to consider various tax reform options. On February 26, 2014, House Ways and Means Committee Chairman Dave Camp released the Tax Reform Act of 2014, a comprehensive tax reform discussion draft.1 The Tax Reform Act of 2014 builds on previously released discussion drafts related to international tax, financial products, and small businesses. Earlier in the 113th Congress, former Senate Finance Committee Chairman Max Baucus released several tax reform discussion drafts, addressing international tax, cost recovery, tax administration, and energy tax policy. Several other comprehensive tax reform bills have been introduced in the 113th Congress, including proposals to replace the current federal tax system with a retail sales tax or to establish a flat tax. While the Bipartisan Budget Act of 2013 did not contain general tax reform instructions, the earlier House- and Senate-passed budget resolutions (H.Con.Res. 25 and S.Con.Res. 8, respectively) recommend substantial changes to current revenue policies. Additionally, the President’s FY2015 Budget proposes substantive reforms to current revenue policies.Late in the 113th Congress, former House Ways and Means Committee Chairman Dave Camp introduced a comprehensive tax reform bill, the Tax Reform Act of 2014 (H.R. 1). While no action was taken on H.R. 1 in the 113th Congress, tax reform remained a key issue of interest early in the 114th Congress. In January 2015, the Senate Finance Committee established five bipartisan working groups to evaluate tax reform options.1 There are various policy options for achieving comprehensive tax reform. One option is to enact a base-broadening reform, maintaining the current system with reduced tax rates, in the spirit of the Tax Reform Act of 2014. A second option is to substantially revise or eliminate the current tax system, instead relying on an alternative tax base for revenues (e.g., taxing consumption rather than income). Tax reform legislation introduced early in the 114th Congress has tended to take the latter approach, proposing a retail sales tax at the federal level or a flat tax. Either option can be Either option can be designed to be revenue-neutral or change the revenue outlook, depending on the exact provisions of the reform. of the reform. As an alternative to comprehensive tax reform, Congress may choose to consider reforms to certain parts of the code. For example, Congress may choose to consider international tax reform options, or evaluate business-only options. Congress may also consider other non-reform but taxrelated issues, such as the “tax extenders.”2 Tax systems are often evaluated using the criteria of efficiency, equity, and simplicity. One goal of tax reform is to enhance economic efficiency, removing provisions in the code that adversely affect decision makingdecisionmaking and economic output. Changes in tax policy also have equity implications, with respect to “fairness” of the tax code. The current tax code is widely seen as being overly complex. Thus, tax reform provides the opportunity to simplify the U.S. tax system. Balancing these three objectives often involves trade-offs. Balancing the trade-offs in these objectives is one of the challenges policy makerspolicymakers face in implementing tax reform. A major challenge for tax reform in the 113th Congress is the question of revenues. If tax reform raises revenues, should these revenues be used to reduce tax rates, reduce the budget deficit, or some combination of the two? Revenues from tax reform are one option for reducing budget deficits and the national debt. Some Members maintain that a revenue increase is unnecessary because spending reductions can be sufficient to reduce the deficit.2 1 The full discussion draft and related materials can be found at http://tax.house.gov/. Americans for Tax Reform (ATR) opposes all tax increases as a matter of principle. In the 113th Congress, 219 U.S. Representatives and 39 U.S. Senators have taken an ATR pledge never to raise income taxes, http://www.atr.org, March 27, 2013. 2 Congressional Research Service 1 Tax Reform in the 113th Congress: An Overview of Proposals Tax Reform Options Fundamental or comprehensive tax reform may be achieved either by modifying the existing income tax system or by adding a new source of tax revenue (e.g., replacing the current tax system). In modifying the existing tax system, base-broadening could raise additional tax revenues. The additional revenues could either be used to reduce tax rates or for deficit reduction. Similarly, revenues from a new tax (e.g., a consumption tax) could be used to offset reductions in current taxes, or to reduce the deficit. Tax Reform Options Fundamental or comprehensive tax reform may be achieved either by modifying the existing income tax system or by changing the source of tax revenue (e.g., replacing the current tax system). In modifying the existing tax system, base-broadening could raise additional tax revenues. The additional revenues could either be used to reduce tax rates or for deficit reduction. Similarly, revenues from a new tax (e.g., a consumption tax) could be used to offset reductions in current taxes, or to reduce the deficit. Much of the recent debate has centered around a revenueneutral tax reform, with lower rates on individual and corporate income. Either base-broadening or an alternative revenue source could be used to pay for lower rates in a revenue-neutral tax reform. 1 For details on the working groups, see The United States Senate Committee on Finance, “Hatch, Wyden Launch Bipartisan Finance Committee Tax Reform Working Groups,” press release, January 15, 2015, http://www.finance.senate.gov/newsroom/chairman/release/?id=2ea8c8e5-c892-4230-9d1a-db7522a920be. 2 CRS Report R43898, Tax Provisions that Expired in 2014 (“Tax Extenders”), by Molly F. Sherlock. Congressional Research Service 1 Tax Reform in the 114th Congress: An Overview of Proposals Income Tax Reform: Base-Broadening3 Some Members of Congress have expressed concern about the large number and high cost of tax expenditures.4 Examples of tax expenditures include the deduction for mortgage interest on owner-occupied residences and the deduction for property taxes on owner-occupied residences. Many tax expenditures are seen as targets to be reduced or eliminated. In evaluating tax expenditures, one issue Congress may want to consider is whether the benefits of a particular tax expenditure exceed the costs of that tax expenditure.5 Identifying and quantifying the costs and benefits associated with particular tax expenditure provisions, however, can be challenging.6 The current tax reform debate generally deals with the issue of broadening the individual and corporate income tax bases, often by scaling back or eliminating tax expenditures. The additional revenues could be used to lower marginal tax rates, reduce the deficit, or achieve some combination of these two options. Both the Tax Reform Act of 2014 and the Fiscal Commission’s 2010 tax reform proposal pay for, reduced tax rates at least in part, reduced tax rates by repealing or reforming most many major tax expenditures.7 The tax expenditures associated with the individual and the corporate tax differ in their size and value, and thus in their scope for potential revenue generation. The potential revenue gain from individual tax expenditures is very large, roughly $1 trillion and about three-fourths of the existing revenuelarge as they currently result in roughly $1 trillion of lost revenue annually. While these large amounts suggest a significant scope for base-broadening, most of these tax expenditures arise from a limited number of provisions, many of which are very popular and broadly used, are difficult to eliminate in a technical sense, and/or are considered desirable desirable provisions.7 In recent analysis8 In 2012, the Joint Committee on Taxation (JCT) found that a revenue-neutral reform that (1) repealed the AMT; (2) repealed all itemized deductions; (3) taxed capital gains and dividends at ordinary rates; and (4) retained the earned income tax credit (EITC), child tax credit, and tax benefits for retirement savings and healthcare could reduce rates by 4%. Thus, the top individual income tax bracket would be reduced from 39.6% to 38.02%.9 Corporate tax expenditures are relatively small in value, partially reflecting the smaller corporate tax base. Analysis suggests that eliminating all corporate tax expenditures would allow the 3 3 Typically, a base-broadening tax reform is one that eliminates certain tax preferences, such as tax deductions, credits, or exclusions. This allows tax rates to be applied to a larger income base. Base-broadening can be used to pay for rate reductions in a revenue-neutral tax reform. 4 For an analysis of tax expenditures, see CRS Report RL34622R44012, Tax Expenditures and the Federal Budget, by Thomas L. Hungerford: Overview and Analysis, by Donald J. Marples. 5 For background material on tax expenditures, see Senate Committee on the BudgetCRS Report CP10001, Tax Expenditures: Compendium of of Background Material on Individual Provisions, S. Prt. 112-45, 112th Congress, 2nd Sess., December 2012—A Committee Print Prepared for the Senate Committee on the Budget, by Jane G. Gravelle et al. 6 For background on other considerations to be made when evaluating tax expenditures, see U.S. Government Accountability Office, Tax Expenditures: Background and Evaluation Criteria and Questions, GAO-13-167SP, November 29, 2012, http://www.gao.gov/assets/660/650371.pdf. 7 See CRS Report R42435, The Challenge of Individual Income Tax Reform: An Economic Analysis of Tax Base Broadening, by Jane G. Gravelle and Thomas L. Hungerford. Congressional Research Service 2 Tax Reform in the 113th Congress: An Overview of Proposals (EITC), child tax credit, and tax benefits for retirement savings and healthcare could reduce rates by 4%. Thus, the top individual income tax bracket would be reduced from 39.6% to 38.02%.8 Corporate tax expenditures are relatively small in value, partially reflecting the smaller corporate tax base. Analysis suggests that eliminating all corporate tax expenditures would allow the statutory corporate tax rate to be reduced from 35% to roughly 28% to 29%.9The Fiscal Commission’s illustrative tax reform proposal can be found in the Report of the National Commission on Fiscal Responsibility and Reform, “The Moment of Truth,” December 2010, available at https://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf. 8 See CRS Report R42435, The Challenge of Individual Income Tax Reform: An Economic Analysis of Tax Base Broadening, by Jane G. Gravelle and Thomas L. Hungerford. 9 See Letter from Joint Committee on Taxation to Honorable Max Baucus and Honorable Orrin G. Hatch, United States Senate, October 11, 2012, available at http://democrats.waysandmeans.house.gov/sites/ democrats.waysandmeans.house.gov/files/112-1671.pdf. Congressional Research Service 2 Tax Reform in the 114th Congress: An Overview of Proposals statutory corporate tax rate to be reduced from 35% to roughly 28% to 29%.10 These basebroadening provisions are also concentrated in a few provisions, which may be difficult to change, such as accelerated depreciation.1011 There are, however, some significant potential basebroadening provisions outside of tax expenditures. For example, additional revenues could result from taxing large pass-through entities that currently pay taxes at the individual level as corporations11corporations12 or by restricting interest deductions.1213 Enacting additional base-broadening reforms could be used to reduce the corporate tax rate below what could be achieved through revenueneutral policy that only eliminated tax expenditures. There has been a particular focus, as well, on the tax treatment of foreign source income of multinationals. Under the current system, U.S.-based companies with foreign-source income may be subject to U.S. taxes on that income. However, deferral allows tax payments to be deferred until the income earned abroad is repatriated (returned) to the United States. Some proposals would eliminate the U.S. taxation of income earned abroad by U.S.-based multinationals, which could, depending on the details of the proposal, narrow the tax base. Another option is to increase the taxation of foreign-source income of U.S.-based multinationals, through limiting deferral, for example. Increasing the amount of foreign-source income subject to tax would broaden the tax base. International issues have also been an impetus for lowering the corporate tax rate.1314 As an additional challenge, corporate tax reform, business tax reform, or individual tax reform in isolation would be difficult to achieve, as the corporate and individual tax systems are highly interconnected. Many of the corporate preferences also benefit unincorporated business, also known as pass-throughs.14or “passthroughs.”15 For pass-through entities, business income is subject to the individual income tax. 8 See Letter from Joint Committee on Taxation to Honorable Max Baucus and Honorable Orrin G. Hatch, United States Senate, October 11, 2012, available at http://democrats.waysandmeans.house.gov/sites/ democrats.waysandmeans.house.gov/files/112-1671.pdf. 9 The Tax Reform Act of 2014 proposed reducing statutory tax rates in both the individual and corporate income tax systems. Under this proposal, there would have been two individual income tax brackets, set at 10% and 25%, with a 10% surtax for certain higher-income taxpayers, for a top individual rate of 35%. Corporate tax rates would have been reduced to 25%, with this reduction phased in over time. The cost of these rate reductions would have been partially offset through base-broadening, and partially through other revenue-raising policies, so as to be 10 CRS Report RL34229, Corporate Tax Reform: Issues for Congress, by Jane G. Gravelle and Memo from Thomas A. Barthold, Joint Committee on Taxation, October 27, 2011, available at http://democrats.waysandmeans.house.gov/sites/ democrats.waysandmeans.house.gov/files/documents/JCTRevenueestimatesFinal.pdf. 1011 See CRS Report R42726, The Corporate Income Tax System: Overview and Options for Reform, by Mark P. Keightley and Molly F. Sherlock and CRS Report RL34229, Corporate Tax Reform: Issues for Congress, by Jane G. Gravelle. 1112 See CRS Report R42451, Taxing Large Pass-Throughs As Corporations: How Many Firms Would Be Affected?, by Mark P. Keightley. 1213 According to one estimate, reducing the interest deduction to disallow the inflation premium would allow for a 2.5 percentage point reduction in the corporate tax rate. See CRS Report RL34229, Corporate Tax Reform: Issues for Congress, by Jane G. Gravelle. 1314 CRS Report RL34115, Reform of U.S. International Taxation: Alternatives, by Jane G. Gravelle, and CRS Report R42624, Moving to a Territorial Income Tax: Options and Challenges, by Jane G. Gravelle. For a discussion of the international effects of lowering the corporate tax rate, see CRS Report R41743, International Corporate Tax Rate Comparisons and Policy Implications, by Jane G. Gravelle. For a primer on international corporate taxation, see CRS Report R41852, U.S. International Corporate Taxation: Basic Concepts and Policy Issues, by Mark P. Keightley and Jeffrey M. Stupak. 15. 14 Non-corporate businesses, including S corporations and partnerships, pass their income through to owners who pay taxes. Collectively, these non-corporate business entities are referred to as pass-throughs. For these types of entities, business income is taxed only once, at individual income tax rates. Congressional Research Service 3 Tax Reform in the 113th Congress: An Overview of Proposals The Tax Reform Act of 2014 would reduce statutory tax rates in both the individual and corporate income tax systems. Under this proposal, there would be two individual income tax brackets, set at 10% and 25%, with a 10% surtax for certain higher-income taxpayers. Corporate tax rates would be reduced to 25%, with this reduction phased in over time. The cost of these rate reductions is partially offset through base broadening, and partially through other revenue-raising policies, such that they are 114th Congress: An Overview of Proposals revenue-neutral over the 10-year budget window. Additional details on the Tax Reform Act of 2014 are provided belowin a section later in the report. A New Tax or Revised Tax Base Alternative revenue options may be sought for a number of reasons. If the revenues generated through base-broadening do not fully finance desired rate reductions, alternative revenue sources may be sought to fill the gap. Revenue from an add-on tax could allow for the retention of more tax expenditures and smaller reductions in other tax expenditures, or larger tax rate reductions. Further, Congress may choose to seek alternative revenue sources to reduce the budget deficit and national debt. An alternative revenue source or tax base (e.g., consumption) might also be supported as an option for improving economic efficiency. There are several options for imposing a broad-based consumption tax. These include a valueadded tax (VAT), a retail sales tax, and a flat tax. A value-added tax is a tax on the value that a firm adds to a product at each stage of production.15 The value the firm adds is the difference between a firm’s sales and a firm’s purchases of inputs from other firms. The VAT is collected by each firm at every stage of production. A retail sales tax is a consumption tax levied only at a single stage of production, the retail stage.16 The retailer collects a specific percentage markup in the retail price of a good or service, which is then remitted to the government. Both the VAT and the retail sales tax have the potential of a robust revenue yield. Another option for implementing a broad-based consumption tax would be to levy a so-called “flat tax” (often referred to as a Hall-Rabushka flat tax after the two economists who popularized this proposal).1716 Flat tax proposals generally have two components: a wage tax and a cash-flow tax on businesses.1817 With this form, a flat tax is essentially a modified VAT, with wages and pensions subtracted from the VAT base and taxed at the individual level. Under a standard VAT, a firm would not subtract its wage and pension contributions when calculating its tax base. Under the flat tax, some wage income may not be included in the tax base because of personal exemptions. Other potentially new revenue sources include environmental taxes or taxes on the financial sector. Environmental taxes have been proposed as an option to simultaneously reduce pollution and raise revenue. The most frequently discussed energy tax is a carbon tax that would be levied on the volume of carbon emitted.19 Another alternative energy tax option would be higher 15 For a comprehensive overview of the concept of a U.S. VAT, see CRS Report R41602, Should the United States Levy a Value-Added Tax for Deficit Reduction?. For a primer on the VAT, see CRS Report R41708, Value-Added Tax (VAT) as a Revenue Option: A Primer. 16 For a contrast between the VAT and the national sales tax, see CRS Report RL33438, A Value-Added Tax Contrasted With a National Sales Tax. 17 18 Another alternative energy tax option would be higher gasoline taxes.19 Options for imposing new taxes on the financial sector include a securities transaction tax20 or taxes on certain types of financial institutions, such as systemically important 16 For detailed information, see CRS Report 98-529, Flat Tax: An Overview of the Hall-Rabushka Proposal. 18 A wage tax is a tax only on salaries and wages. A cash-flow tax is generally a tax on gross receipts minus all outlays. 1918 See CRS Report R42731, Carbon Tax: Deficit Reduction and Other Considerations, by Jonathan L. Ramseur, Jane (continued...)A. Leggett, and Molly F. Sherlock. 19 For an analysis of the gasoline tax, see CRS Report R40808, The Role of Federal Gasoline Excise Taxes in Public Policy, by Robert Pirog. 20 For background, see CRS Report R41192, A Securities Transaction Tax: Financial Markets and Revenue Effects, by Mark P. Keightley. 17 Congressional Research Service 4 Tax Reform in the 113th Congress: An Overview of Proposals gasoline taxes.20 Options for imposing new taxes on the financial sector include a securities transaction tax21 or taxes on certain types of financial institutions, such as systemically important financial institutions (SIFIs).22114th Congress: An Overview of Proposals financial institutions (SIFIs).21 The Tax Reform Act of 2014 proposed an excise tax be imposed on the consolidated assets of SIFIs in excess of $500 billion. Framework for Evaluation In evaluating any change in tax policy, the prevailing economic framework is to analyze the tax policy for equity, efficiency, and simplicity. Tradeoffs may exist between these three objectives. For example, if greater income equality is desired, this may conflict with the goal of economic efficiency. Equity Economic theory maintains that it is not possible to make interpersonal comparisons of utility.22 Hence, whether a change in the distribution of income, with gainers and losers, is an improvement in the national welfare is a value judgment. The effects on different groups, however, can be measured and debated. When considering the fairness of the distribution of tax burdens, the concepts of horizontal and vertical equity are often considered. Horizontal equity holds that taxpayers with similar incomes should face similar tax burdens. Tax preferences that allow certain taxpayers to claim deductiondeductions, credits, or exemptions to reduce tax burdens often result in situations where taxpayers with similar incomes face different tax burdens. Evaluating horizontal equity involves exploring whether taxpayers in similar circumstances pay approximately the same amount of taxes. For example, will the tax burden on two single cohabiting single taxpayers be the same as the burden on a similarly situated married couple? Vertical equity examines the distribution of tax burdens across different income groups. Under an ability-to-pay standard, vertical equity would suggest that taxpayers in higher income groups pay more. How much more is a policy question. Should the after-tax distribution of income be the same as the pre-tax distribution (suggesting taxation should be proportional)? Or should taxpayers with a greater ability to pay have a proportionally higher tax burden (suggesting taxation should be progressive)? In looking at the income of taxpayers, is annual or lifetime income the appropriate ability-to-pay metric? There are also questions as to whether tax reform should seek to be “distributionally neutral,” keeping the share of the tax burden borne by different income groups roughly the same. Evaluating the fairness of tax policy, from an economic perspective, may also involve asking several other questions. For example, what will be the effect on taxpayers in different age groups? (...continued) A. Leggett, and Molly F. Sherlock. 20 For an analysis of the gasoline tax, see CRS Report R40808, The Role of Federal Gasoline Excise Taxes in Public Policy, by Robert Pirog. 21 For background, see CRS Report R42078, A Securities Transactions Tax: Brief Analytic Overview with Revenue Estimates, by Mark P. Keightley and CRS Report R41192, A Securities Transaction Tax: Financial Markets and Revenue Effects, by Mark P. Keightley. 22 The Tax Reform Act of 2014 proposes an excise tax be imposed on the consolidated assets of SIFIs in excess of $500 billion. For background on these types of institutions, see CRS Report R42150, Systemically Important or “Too Big to Fail” Financial Institutions, by Marc Labonte. Congressional Research Service 5 Tax Reform in the 113th Congress: An Overview of Proposals Will there be distributional effects by region of the country? Another consideration might be how minority groups could be affected. Will there be distributional effects by region of the country? Another consideration might be how minority groups could be affected. 21 For background on these types of institutions, see CRS Report R42150, Systemically Important or “Too Big to Fail” Financial Institutions, by Marc Labonte. 22 In economics, utility is an abstract concept used to measure an individual’s satisfaction or benefit from consumption of goods and services. Congressional Research Service 5 Tax Reform in the 114th Congress: An Overview of Proposals Efficiency Tax policy should promote economic efficiency; that is, tax policy should be as neutral as possible by minimizing economic distortions.23 Low marginal tax rates tend to lessen distortions. Taxes that are applied to a broad base, with few exclusions or exemptions, also tend to be more economically efficient. Many efficiency questions concern household decisions, specifically those related to savings and labor choices. In the long run, savings used for investment promotespromote economic growth. Increased labor supply can also positively contribute to GDP. Thus, in evaluating economic efficiency, the following types of questions might be asked. What will be the effect of a tax change on households’ decisions to save versus consume? Will household decisions about the composition of goods and services consumed be affected? Will households’ choices of leisure versus work be affected? Other efficiency questions concern firms’ decisions. What will be the effect on firms’ decisions concerning the method of financing (debt or equity), choice among inputs, type of business organization (corporation, partnership, or sole proprietorship), and composition of output? Simplicity The greater the simplicity of the tax system, the lower will be the administrative and compliance costs. Tax compliance tends to increase with simplicity such that simplifying the tax system could help reduce the tax gap.24 Thus, tax policy should eliminate any unnecessary complexity and promote transparency. Numerous questions concerning simplicity arise; among them are the following: How will a tax change affect federal administrative costs? Will the administrative costs of state and local governments change? How will compliance costs of households be affected? Will business compliance costs change? Tax Reform in the 113th Congress A number of tax reform proposals have been put forward by Members in the 113th Congress. While tax reform may not be enacted by the current Congress, it is likely that tax reform will remain part of the policy conversation throughout the remainder of the 113th Congress and into the 114th Congress. 23 The loss in economic efficiency due to a tax is referred to by economists as the deadweight loss or excess burden of the tax. 24 The tax gap is the difference between taxes that should have been paid if taxpayers were fully compliant with all tax laws and taxes that were actually collected. Congressional Research Service 6 Tax Reform in the 113th Congress: An Overview of Proposals Committee on Ways and Means and Committee on Finance The House Committee on Ways and Means continues to work towards comprehensive tax reform in the 113th Congress. On February 26, 2014, Chairman Camp released the Tax Reform Act of 2014.25 This proposal would broaden the tax base and restructure statutory tax rates in both the individual and corporate income tax systems, change the tax treatment of foreign-source income for U.S. multinational corporations, and make dozens of other changes to the federal tax system (additional details can be found in the shaded text box below). This reform builds on earlier discussion drafts that had been released by Chairman Camp. Chairman Camp’s first tax reform discussion draft on international tax reform was released during the 112th Congress.26 A number of the international tax reform proposals in the Tax Reform Act of 2014 appeared in this earlier discussion draft. Similar to the earlier draft, the Tax Reform Act of 2014 would allow a 95% dividends received deduction for foreign business income. As a transition rule, the earlier draft had proposed a 5.25% tax on undistributed foreign earnings. The Tax Reform Act of 2014 also proposes taxing accumulated deferred foreign earnings, with a higher rate of 8.75% for cash, with other earnings held abroad taxed at 3.5%. In an effort to prevent tax base erosion, the Tax Reform Act of 2014 would tax foreign income generated by U.S. companies through the use of intangibles.27 Other proposals in the Tax Reform Act of 2014 are similar to proposals contained in Camp’s previous discussion drafts. Similar to proposals made in Camp’s January 24, 2013, financial products discussion draft,28 the Tax Reform Act of 2014 would require that derivatives would be marked-to-market at year-end, such that taxpayers would recognize income or losses. With respect to small businesses, the Tax Reform Act of 2014 does not include the broader reform option that had appeared in the March 12, 2013, small business discussion draft.29 Instead, the Tax Reform Act of 2014 proposes a number of changes to existing pass-through and partnership tax rules. Among the many proposals are provisions that would tax carried interest as ordinary income, change rules related to partnership audits and adjustments, and restrict the use of publicly traded partnerships. Former Committee on Finance Chairman Max Baucus also released several discussion drafts related to tax reform. The former chairman released discussion drafts related to international tax reform, tax administration, cost recovery and accounting, and energy tax policy. The discussion drafts were released in addition to a series of tax reform options papers put forward by the committee earlier in the year.30 25 A full text of the draft and related materials can be found at http://tax.house.gov/. For the 2012 International Tax Reform discussion draft and related materials, see http://waysandmeans.house.gov/ taxreform/. 27 Camp’s earlier discussion draft had included two other options for addressing profit shifting concerns. These options included (1) current taxation of foreign profits when income is earned from intangibles, income exceeds the normal rate of return, and income is earned in a low-tax country (this is referred to as President Obama’s “excess returns” proposal) or (2) tax income that is subject to an effective foreign tax rate below 10% unless it qualifies for a home country exception. For more on policy options for addressing corporate profit shifting, see CRS Report R40623, Tax Havens: International Tax Avoidance and Evasion, by Jane G. Gravelle. 28 For the Financial Productions discussion draft and related materials, see http://waysandmeans.house.gov/taxreform/. 29 For the Small Business discussion draft and related materials, see http://waysandmeans.house.gov/taxreform/. 30 The Senate Finance Committee’s tax reform options papers are available online at http://www.finance.senate.gov/ (continued...) 26 Congressional Research Service 7 Tax Reform in the 113th Congress: An Overview of Proposals Reforming the Income Tax System: Legislative Proposals in the 113th Congress The Tax Reform Act of 2014 (discussion draft)31 This proposal would make substantial changes to the current federal tax system, modifying individual, corporate, and business income taxes, while also changing the tax treatment of multinational corporations. The proposal would also make a number of changes related to the treatment of tax-exempt entities, tax administration and compliance, and excise taxes. Individual Income Tax Under the proposal, there would be two regular income tax brackets, with rates of 10% and 25%. A third bracket would apply to an alternative definition of income, making for a top statutory rate of 35%. The 35% bracket results from a 10% tax on modified adjusted gross income (MAGI) above certain income thresholds ($400,000 for single filers; $450,000 for joint filers (adjusted for inflation)). The 10% bracket is phased-out for certain higher-income taxpayers. Brackets would be adjusted for inflation using chained-CPI. Dividends and capital gains would be taxed as ordinary income, but 40% of net capital gains and qualified dividends would be excluded from taxable income. The proposal would also repeal the Alternative Minimum Tax (AMT). Other substantial changes to the structure of the individual income tax system include an elimination of personal exemptions and an increase in the standard deduction. The standard deduction would be set at $22,000 for joint filers, and $11,000 for other individual filers. An additional standard deduction of $5,500 would be available for single filers with at least one child. The standard deduction would be phased-out for certain higher-income taxpayers. The proposal would also modify or eliminate a number of individual income tax credits, deductions, and other provisions. Major changes include eliminating the deduction for state and local tax payments; scaling back the mortgage interest deduction and earned income tax credit (EITC); modification of the charitable deduction and education incentives; and changes in 401(k) and Roth IRA retirement savings vehicles. Corporate and Business Income Tax All C corporations would be taxed at a top statutory rate of 25% under the proposal, with the statutory rate reduction phased in through 2019. Other business income, including income earned by S corporations, partnerships, and sole proprietorships, would be taxed through the individual income tax system. Similar to the individual system, the proposal would modify or eliminate a number of corporate and business income tax credits, deductions, and other provisions. Among the changes are elimination of the modified accelerated cost recovery system (MACRS); requiring amortization of research and experimental expenditures and advertising expenses; a modification of the net operating loss (NOL) deduction; a phased-out repeal of the Section 199 domestic production activities deduction; and repeal of the last-in, first-out (LIFO) method of inventory accounting. The corporate AMT is also repealed. Taxation of Multinationals The proposal would make significant changes to the tax treatment of foreign source income earned by U.S. multinational corporations. Specifically, the proposal would adopt a 95% exemption for dividends received by U.S. corporations from foreign subsidiaries. Subpart F rules would be modified, providing broad taxation of intangible income of foreign subsidiaries when earned, with foreign intangible income subject to a 15% rate (once fully phased in). The proposal also includes “thin capitalization” rules that restrict domestic interest deductions. There would also be a one-time tax on previously untaxed earnings and profits (E&P) of foreign subsidiaries of U.S. corporations. E&P retained as cash would be taxed at 8.75% while any remaining E&P would be taxed at 3.5%. Other Changes Numerous changes were also proposed with respect to tax-exempt entities, administration and compliance, and excise taxes. Among the proposed changes is an excise tax on systemically important financial institutions. (...continued) issue/?id=6c61b1e9-7203-4af0-b356-357388612063 31 A full section-by-section summary of the Tax Reform Act of 2014, as prepared by the staff of the House Committee on Ways and Means, can be found at http://waysandmeans.house.gov/uploadedfiles/ ways_and_means_section_by_section_summary_final_022614.pdf. Congressional Research Service 8 Tax Reform in the 113th Congress: An Overview of Proposals Under Senator Baucus’s international tax reform proposal, passive and highly mobile forms of foreign-earned income would be taxed at the full U.S. rate, as would income earned from goods ultimately consumed in the United States. Two alternatives were put forth for taxing income earned from products and services sold abroad. “Option Y” would subject all foreign-earned income to a minimum tax, which the draft sets at 80% of the U.S. statutory rate. “Option Z” would tax 60% of foreign active business income at the U.S. rate. Similar to Chairman Camp’s international tax proposals, undistributed foreign earnings would be subject to a one-time tax. The Baucus discussion draft sets this rate at 20%. Reforms to cost recovery and accounting rules have also been put forward by former Chairman Baucus as a discussion draft. Proposed reforms would eliminate the modified accelerated cost recovery system (MACRS), enacting instead a system that uses asset pools and longer lives that more closely approximate economic depreciation. Certain intangibles, including research and experimentation as well as advertising expenditures, would be capitalized and amortized. Last-in, first-out (LIFO) inventory accounting rules would be repealed. Small-business expensing allowances would be increased such that more businesses would be allowed to use cash accounting. A number of similar proposals appear in the Tax Reform Act of 2014, discussed above. Former Chairman Baucus has also released a discussion draft related to tax administration and energy tax reform. This tax administration draft contained several proposals designed to reduce the tax gap, enacting additional data reporting requirements and anti-fraud provisions. The energy tax reform discussion draft proposes clean energy production and investment tax credits designed to replace existing incentives for renewables and other clean electricity resources (e.g., nuclear, carbon capture, and sequestration). These credits would be available for the long term, but are designed to begin phasing out once the annual average greenhouse gas emissions rate falls below a specified threshold. The proposal also contains a new tax credit for clean transportation fuels. Legislative Proposals Reform the Income Tax System Current tax reform efforts in the Committee on Ways and Means and recent reform proposals coming from the Committee on Finance appear to be focused on reforming, rather than replacing, the current tax code. Additional detail on proposals being made by the current and former leadership of these committees is provided above. Additional legislative proposals in the 113th Congress would reform the current income tax system. Specifically, the Family Fairness and Opportunity Tax Reform Act (S. 1616) proposes substantive changes to the current income tax. Specifically, S. 1616 would consolidate the tax brackets, repeal the alternative minimum tax (AMT), provide an additional child tax credit and personal credit, eliminate the standard deduction and most itemized deductions (retaining, with modifications, the deduction for mortgage interest and charitable contributions), in addition to making other changes to the tax code. Congressional Research Service 9 Tax Reform in the 113th Congress: An Overview of Proposals114th Congress Tax reform options continue to be actively debated in the 114th Congress. While there has been sustained congressional interest in tax reform, it is not clear what form reform might take. Comprehensive tax reform, similar to what was proposed in the Tax Reform Act of 2014, remains an option. It is also possible that tax reform efforts proceed but target a specific sector of the economy, through a business-only tax reform or a reform of international tax law. Committee on Finance Early in the 114th Congress, Senate Finance Committee Chairman Orrin Hatch and Ranking Member Ron Wyden announced the creation of “tax reform working groups,” with the goal of 23 The loss in economic efficiency due to a tax is referred to by economists as the deadweight loss or excess burden of the tax. 24 The tax gap is the difference between taxes that should have been paid if taxpayers were fully compliant with all tax laws and taxes that were actually collected. Congressional Research Service 6 Tax Reform in the 114th Congress: An Overview of Proposals providing tax reform recommendations.25 The working groups were to provide recommendations for tax reform in five areas: (1) individual income tax; (2) business income tax; (3) savings and investment; (4) international tax; and (5) community development and infrastructure. In March 2015, the committee announced it would be seeking input from stakeholders on how to make the tax code “simpler, fairer, and more efficient.”26 Stakeholder submissions were posted on the Finance Committee’s website in April 2015.27 The committee has also held a number of hearings on tax reform in first session of the 114th Congress. Legislative Proposals Reform the Income Tax System As of the date of this report, legislation that would provide a comprehensive reform of the income tax system has not been introduced. Comprehensive tax reform legislation was introduced in December 2014 as the Tax Reform Act of 2014 (H.R. 1), and is discussed below in the section “Tax Reform in the 113th Congress.” Reforming the Current Tax System Through Base-Broadening: Economic Analysis Proposals that broaden the tax base and reduce statutory tax rates are widely believed to promote economic growth. The degree to which a specific set of policies is likely to affect growth, however, depends on changes in the effective marginal tax rates. It is possible for basebroadening to increase effective marginal tax rates, potentially offsetting any growth benefits that would be expected from statutory rate reductions.3228 The Joint Committee on Taxation (JCT) prepared a macroeconomic analysis of the Tax Reform Act of 2014, which was released along with the discussion draft itself.33.29 The JCT’s analysis finds that found that the Tax Reform Act of 2014 would behave been expected to reduce effective marginal tax rates on labor, creating an incentive to work, and increase the after-tax income of individuals, increasing demand for goods and services. Both of these effects would be expected to stimulate the economy. On the corporate side, even though statutory tax rates are reduced, base-broadening provisions, including repeal of accelerated depreciation, lead to higher effective tax rates on some capital investments. Overall, the JCT estimates that the increased cost of capital for domestic firms will lead to reduced investment in domestic capital stock. On net, the JCT estimates suggest that the provisions proposed in the Tax Reform Act of 2014 would increase economic output. Replace the Income Tax System Several proposals have been introduced in the 113th Congress that would replace the income tax system with some alternative form of taxation at the federal level. The Fair Tax Act of 2013 (H.R. 25/S. 122) would repeal the individual income tax, the corporate income tax, all payroll taxes, the self-employment tax, and the estate and gift taxes.34 These taxes would be effectively replaced with a national retail sales tax. Thus, under H.R. 25/S. 122, the current federal tax system, based on taxing income, would be replaced with a system that taxes consumption. The Flat Tax Act (H.R. 1040) proposes to allow taxpayers to elect to be subject to a flat tax, as an alternative to the current tax system. Individuals and businesses electing a flat tax would pay a flat rate of 19% for the first two years, and a rate of 17% thereafter. The Simplified, Manageable, And Responsible Tax (SMART) Act (S. 173) also proposes a flat tax of 17% on individuals’ wages and business taxable income. The flat tax systems proposed in H.R. 1040 and S. 173 are structurally similar to the Hall-Rabushka flat tax proposal.35 The American Growth & Tax Reform Act of 2013 (H.R. 2393) would require the Secretary of the Treasury to submit to Congress a legislative proposal for a progressive consumption tax. H.R. 32 increased the after-tax income of individuals, increasing 25 Senate Committee on Finance, “Hatch, Wyden Launch Bipartisan Finance Committee Tax Reform Working Groups,” press release, January 15, 2015, http://www.finance.senate.gov/newsroom/chairman/release/?id=2ea8c8e5c892-4230-9d1a-db7522a920be. In a January 22, 2015, hearing on Jobs and the Economy Senate Finance Committee Chairman Hatch stated that he had “made tax reform my highest legislative priority for [the 114th] Congress.” The Chairman’s statement is available at http://www.finance.senate.gov/hearings/hearing/?id=626b3e14-5056-a032-52da38f3dfeb77ba. 26 Senate Committee on Finance, “Hatch, Wyden Launch New Effort to Seek Input on Bipartisan Tax Reform,” press release, March 11, 2015, http://www.finance.senate.gov/newsroom/chairman/release/?id=3bcf1fcf-9dd8-47d4-920221a0870cd8d6. 27 Stakeholder submissions to the tax reform working groups can be found at http://www.finance.senate.gov/legislation/ . 28 For a discussion of base-broadening and the effects on marginal tax rates in individual income tax system, see CRS Report R43079, Restrictions on Itemized Tax Deductions: Policy Options and Analysis, by Jane G. Gravelle and Sean Lowry. A discussion of base-broadening in the context of the corporate tax system can be found in CRS Report R42726, The Corporate Income Tax System: Overview and Options for Reform, by Mark P. Keightley and Molly F. Sherlock. 3329 U.S. Congress, Joint Committee on Taxation, Macroeconomic Analysis of the “Tax Reform Act of 2014”, committee print, 113th Cong., February 26, 2014, JCX-22-14. 34 Similar legislation was introduced in the 112th Congress as the Fair Tax Act of 2011 (H.R. 25/S. 13). 35 For background information on the Hall-Rabushka flat tax proposal, see CRS Report 98-529, Flat Tax: An Overview of the Hall-Rabushka Proposal. Congressional Research Service 10 Tax Reform in the 113th Congress: An Overview of Proposals 2393 would be designed to eliminate the public debt outstanding. Specifically, the Treasury would be directed to provide rates and details on a progressive consumption tax to eliminate the public debt under scenarios in which (1) the consumption tax were in addition to other taxes; (2) the consumption tax would replace the individual income tax; and (3) the consumption tax would replace the corporate income tax. Replacing the Income Tax System: Legislative Proposals in the 113th Congress The Fair Tax Act of 2013 (H.R. 25/S. 122) Congressional Research Service 7 Tax Reform in the 114th Congress: An Overview of Proposals demand for goods and services. Both of these effects would be expected to stimulate the economy. On the corporate side, even though statutory tax rates would have been reduced, basebroadening provisions, including repeal of accelerated depreciation, would have led to higher effective tax rates on some capital investments. Overall, the JCT estimated that the increased cost of capital for domestic firms would lead to reduced investment in domestic capital stock. On net, the JCT estimates suggest that the provisions proposed in the Tax Reform Act of 2014 would increase economic output. Replace the Income Tax System Several proposals to replace the income tax system have been introduced in the 114th Congress. The Fair Tax Act of 2015 (H.R. 25/S. 155), the Flat Tax Act (H.R. 1040), and the Simplified, Manageable, and Responsible Tax (SMART) Act (H.R. 1824/S. 929) have all been introduced in previous Congresses. The Fair Tax Act of 2015 would replace the current income tax system with a national retail sales tax. Both the Flat Tax Act and the SMART Act would impose a flat tax system that is structurally similar to the Hall-Rabushka flat tax proposal, taxing wages and business taxable income. Replacing the Income Tax System: Legislative Proposals in the 114th Congress The Fair Tax Act of 2015 (H.R. 25/S. 155)30 This legislation proposes to repeal the individual income tax, the corporate income tax, all payroll taxes, the selfemployment tax, and the estate and gift taxes.36 These taxes would be effectively replaced with a 23% (tax-inclusive, meaning that the rate is a proportion of the after-tax rather than the pre-tax value) national retail sales tax. The taxinclusive retail sales tax would equal 23% of the sum of the sales price of an item and the amount of the retail sales tax. Every family would receive a rebate of the sales tax on spending amounts up to the federal poverty level (plus an extra amount to prevent any marriage penalty). The Social Security Administration would provide a monthly sales tax rebate to registered qualified families. The 23% national retail sales would not be levied on exports. The sales tax would be separately stated and charged. Social Security and Medicare benefits would remain the same with payroll tax revenue replaced by some of the revenue from the retail sales tax. States could elect to collect the national retail sales tax on behalf of the federal government in exchange for a fee. Taxpayer rights provisions are incorporated into the act. The sales tax would sunset at the end of a seven-year period beginning on the enactment of this act if the Sixteenth Amendment is not repealed. This amendment provided Congress with the “power to lay and collect taxes on incomes.” The Flat Tax Act (H.R. 1040)31 This proposal would authorize an individual or a person engaged in business activity to make an irrevocable election to be subject to a flat tax (in lieu of the existing tax provisions). This act would also repeal estate and gift taxes. For individuals not engaged in business activity who select the flat tax, their initial tax rate would be 19%, but after two years this rate would decline to 17%. The individual flat tax would be levied on all wages, retirement distributions, and unemployment compensation. An individual’s taxable income would also include the taxable income of each dependent child who has not attained age 14 as of the close of such taxable year. The flat tax would have “standard deductions” that would equal the sum of the “basic standard deduction” and the “additional standard deduction.” The “basic standard deduction” would depend on filing status: • $32,496 for a married couple filing jointly or a surviving spouse 30 The Fair Tax Act was introduced in the 113th Congress as (H.R. 25/S. 122) and the 112th Congress as (H.R. 25/S. 13). 31 Similar legislation was introduced in the 113th Congress as the Flat Tax Act (H.R. 1040) and the 112th Congress as the Freedom Flat Tax Act (H.R. 1040). Congressional Research Service 8 Tax Reform in the 114th Congress: An Overview of Proposals • $20,739 for a single head of household • $16,248 for a single person or a married person filing a separate return The “additional standard deduction” would be an amount equal to $6,998 for each dependent of the taxpayer. All deductions would be indexed for inflation using the consumer price index (CPI). For individuals engaged in business activity who select the flat tax, their initial tax rate would be 19% (declining to 17% when the tax was fully phased in two years after enactment) on the difference between the gross revenue of the business and the sum of its purchases from other firms, wage payments, and pension contributions. For those employees electing the flat tax, government employers and employers of nonprofit organizations would pay a flat tax on their employees’ fringe benefits, except retirement contributions, because activities of government entities and tax-exempt organizations would be exempt from the business tax. Any congressional action that raises the flat tax rate or reduces the amount of the standard deduction would require a three-fifths (supermajority) vote in both the Senate and the House of Representatives. 36 Similar legislation was introduced in the 112th Congress as the Fair Tax Act of 2011 (H.R. 25/S. 13). Congressional Research Service 11 Tax Reform in the 113th Congress: An Overview of Proposals The Simplified, Manageable, And Responsible Tax (SMART) Act (S. 173)H.R. 1824/S. 929)32 This act would replace the current individual and corporate income taxes and estate and gift taxes with a flat tax. This flat tax proposal has two components: a wage tax and a cash-flow tax on businesses. The individual wage tax would be levied at a 17% rate. The individual wage tax would be levied on all wages, salaries, pension distributions, and unemployment compensation. An individual’s taxable income would include taxable income of each dependent child who has not attained age 14 as of the close of the taxable year. The individual wage tax would not be levied on Social Security receiptsincome. Thus, the current partial taxation of Social Security payments to highincome households would be repealed. Social Security contributions would continue to be taxed; that is, they would not be deductible and would be made from after-tax income. Firms would pay the business tax on their Social Security contributions. Individuals would pay the wage tax on their Social Security contributions. The individual wage tax would have “standard deductions” that would equal the sum of the “basic standard deduction” and the “additional standard deduction.” The “basic standard deduction” would depend on filing status: • $28,140960 for a married couple filing jointly or a surviving spouse • $17,97018,490 for a single head of household • $14,070480 for a single person or a married person filing a separate return The “additional standard deduction” would be an amount equal to $6,070240 for each dependent of the taxpayer. All deductions would be indexed for inflation using the consumer price index (CPI). Businesses would pay a tax of 17% on the difference (if positive) between gross revenue and the sum of purchases from other firms, wage payments, and pension contributions. This business tax would cover corporations, partnerships, and sole proprietorships. Pension contributions would be deductible but there would be no deductions for fringe benefits. State and local taxes (including income taxes) and payroll taxes (e.g., social security, Medicare, etc.) would not be deductible. If the business’s aggregate deductions exceed gross revenue, then the excess of aggregate deductions can be carried forward to the next year and increased by a percentage equal to the three-month Treasury rate for the last month of the taxable year. Government employers and employers of nonprofit organizations would pay a 17% tax on their employees’ fringe benefits, except retirement contributions, because activities of government entities and tax-exempt organizations would be exempt from the business tax. A supermajority of three-fifths of the Members of the House or Senate would be required to (1) increase any federal income tax rate; (2) create any additional federal income tax rate; (3) reduce the standard deduction; or (4) provide any exclusion, deduction, credit, or other benefit which results in a reduction in federal revenues. 32 The SMART Act was introduced in the 112th Congress as S. 820 and the 113th Congress as S. 173. Congressional Research Service 9 Tax Reform in the 114th Congress: An Overview of Proposals Replacing the Current Tax System with a Consumption Tax: Economic Analysis Considerations Relative to the current system, it is often asserted that a flat tax (or consumption tax)3733 would increase economic efficiency.38 The34 This type of tax is imposed on a broad definition of wage income (or consumption), and there are limited deductions, exemptions, and credits to reduce tax liability.3935 Lower tax rates on a broader tax base tend to promote economic efficiency.40 If the flat 37 A flat tax is equivalent to a value-added tax (VAT) when there are no personal exemptions. Effectively, the wage portion of the flat tax is paid by households rather than businesses. Thus, a flat tax is effectively a consumption tax. 38 A flat tax may yield efficiency gains by effectively taxing consumption rather than income, by broadening the tax base, by reducing tax rates, and by reducing compliance costs. For more, see William G. Gale, “Flat Tax,” in The Encyclopedia of Taxation & Tax Policy, ed. Joseph J. Cordes, Robert D. Ebel, and Jane G. Gravelle, 2nd ed. (Washington, DC: Urban Institute Press, 2005), pp. 149-152. 39 It is possible that deductions, exemptions, and credits could be used in a consumption tax system. As with an income tax system, deductions, exemptions, and credits that erode the consumption tax base may reduce the efficiency of the (continued...) Congressional Research Service 12 Tax Reform in the 113th Congress: An Overview of Proposals 36 If the flat tax (consumption tax) is not applied to capital income or corporate income, the flat tax may contribute to additional capital accumulation and investment.4137 A flat tax (or consumption tax) system, however, is likely to be less progressive than the current tax system, particularly at the top of the income distribution. Thus, efficiency gains achieved by moving to a flat tax (or consumption tax) system would come at the cost of reduced equity, as higher-income groups would tend to see tax burdens decline while lower -income groups would tend to see increased tax burdens. Another potential benefit of a flat tax system is simplicity. A flat tax system would impose one tax rate, and eliminate most of the tax deductions and tax credits currently in the tax code. However, much of the complexity in the current tax system is related to the definition of income, rather than the income tax rates. If the tax were applied only to wage income, this would create an incentive for non-wage compensation (e.g., benefits), as is the case in the current tax system with the exclusion for employer-provided healthcare. Further, if the flat tax system were to run parallel to the current income tax system, as proposed in H.R. 1040, the flat tax could create additional complexity for taxpayers trying to decide whether to elect flat tax treatment. There would also be horizontal inequities, as taxpayers with identical incomes and tax circumstances would have different tax liabilities under the flat tax and income tax systems. Other Tax Reform Legislative Proposals Other legislative proposalsProposals Legislation introduced in the 113th114th Congress would eliminate the current tax code, leaving it to Congress to design a new tax code. The Tax Code Termination Act (H.R. 35227) would terminate the Internal Revenue Code, and declares that any new tax system should be a simple and fair system that (1) applies a low rate to all Americans; (2) provides tax relief for working Americans; (3) protects the rights of taxpayers and reduces tax collection abuses; (4) eliminates the bias against savings and investment; (5) promotes economic growth and job creation; and (6) does not penalize marriage or families.42 The End Wasteful Tax Loopholes Act (S. 8) proposes to express the sense of the Senate that Congress should enact legislation to (1) eliminate wasteful tax loopholes; (2) eliminate corporate tax loopholes and wasteful tax breaks for special interests; (3) enhance tax fairness by reforming or eliminating tax breaks that provide excessive benefits to millionaires and billionaires; (4) crack down on tax cheaters and close the tax gap; (5) use the revenue saved by curtailing tax loopholes to reduce the deficit and reform the federal tax code; (6) address provisions in the tax code that make it more profitable for companies to create jobs overseas than in the United States; and (7) reform the tax code in a manner that promotes job creation, competitiveness, and economic growth. (...continued) overall tax system. 40 the bias against 33 A flat tax is equivalent to a value-added tax (VAT) when there are no personal exemptions. Effectively, the wage portion of the flat tax is paid by households rather than businesses. Thus, a flat tax is effectively a consumption tax. 34 A flat tax may yield efficiency gains by effectively taxing consumption rather than income, by broadening the tax base, by reducing tax rates, and by reducing compliance costs. For more, see William G. Gale, “Flat Tax,” in The Encyclopedia of Taxation & Tax Policy, ed. Joseph J. Cordes, Robert D. Ebel, and Jane G. Gravelle, 2nd ed. (Washington, DC: Urban Institute Press, 2005), pp. 149-152. 35 It is possible that deductions, exemptions, and credits could be used in a consumption tax system. As with an income tax system, deductions, exemptions, and credits that erode the consumption tax base may reduce the efficiency of the overall tax system. 36 If tax deductions, credits, or exemptions address certain market failures, these provisions may enhance economic efficiency. Eliminating efficiency-enhancing provisions, even if the revenues are used to reduce tax rates, will not necessarily increase the efficiency of the entire tax system. 4137 The amount of additional capital accumulation and investment that occurs depends on the responsiveness of savings to changes in the tax rate. For background on this issue, see CRS Report R40411, The Economic Effects of Capital Gains Taxation. 42 The Tax Code Termination Act (H.R. 462) was also introduced in the 112th Congress. Congressional Research Service 1310 Tax Reform in the 113th114th Congress: An Overview of Proposals savings and investment; (5) promotes economic growth and job creation; and (6) does not penalize marriage or families.38 Legislation has also been introduced in the 113th114th Congress to address equity concerns in the current tax system by implementing a so-called “Buffett Rule.”4339 The Paying a Fair Share Act of 2013 (H.R. 766/S. 3212015 (S. 161/H.R. 362) would impose a 30% minimum effective tax rate on taxpayers reporting at least $1 million in income.44 Other Major Fiscal Reform Proposals General instructions for tax reform were not included in the Bipartisan Budget Act of 2013. Section 114 of the act, did, however, provide several deficit-neutral tax reform-related reserve funds for Senate budget enforcement.45 The earlier Senate- and House-passed budget resolutions recommend substantial changes in current tax law. The House budget resolution (H.Con.Res. 25) calls for revenue-neutral comprehensive tax reform, while the Senate budget resolution (S.Con.Res. 8) instructs the Senate Finance Committee to draft revenue legislation that would reduce the deficit by $975 billion over the 2013 to 2023 budget window.46 House and Senate Budget Resolutions The House budget resolution (H.Con.Res. 25) was passed on March 21, 2013. The accompanying H.Rept. 113-17 states that H.Con.Res. 25 seeks to grow the economy through tax reform.47 Specifically, tax reform as outlined in H.Con.Res. 25, would achieve the following objectives:48 • Simplify the tax code to make it fairer to American families and businesses. • Reduce the amount of time and resources necessary to comply with tax laws. • Substantially lower tax rates for individuals, with a goal of achieving a top individual rate of 25%. • Consolidate the current seven individual-income-tax brackets into two brackets with a first bracket of 10%. • Repeal the Alternative Minimum Tax. • Reduce the corporate tax rate to 25%. • Transition the tax code to a more competitive system of international taxation. H.Con.Res. 25 states that revenue-neutral tax reform that meets the objectives listed above should be reported by the Committee on Ways and Means to the House by December 31, 2013. This would allow Congress time to enact comprehensive tax reform during FY2014. The tax reform 43 For additional background on the “Buffett Rule,” see CRS Report R42043, An Analysis of the “Buffett Rule”. The Paying a Fair Share Act of 2012 (S. 2230/H.R. 3903) was also introduced in the 112th Congress. On April 16, 2012, the Senate voted not to invoke cloture on S. 2230. 45 For more information on reserve funds in budget resolutions, see CRS Report R40472, The Budget Resolution and Spending Legislation, by Megan S. Lynch. 46 Additional legislative action is required to enact any policy proposals from a budget resolution. 47 U.S. Congress, House Committee on the Budget, Concurrent Resolution on the Budget - Fiscal Year 2014, Report to Accompany H.Con.Res. 25, 113th Cong., 1st sess., March 15, 2013, H.Rept. 113-17, p. 6. 48 Ibid., p. 7. 44 Congressional Research Service 14 Tax Reform in the 113th Congress: An Overview of Proposals efforts being undertaken by the Committee on Ways and Means are discussed in greater detail elsewhere in this report (see “Committee on Ways and Means” above). The Senate budget resolution (S.Con.Res. 8) was passed on March 23, 2013. This budget resolution states that by October 1, 2013, the Senate Committee on Finance will report revenue legislation that raises $975 billion between fiscal years 2013 and 2023. The committee report accompanying S.Con.Res. 8 states that these additional revenues will result from tax increases on “the wealthiest Americans and biggest corporations.”49 The committee report also notes that S.Con.Res. 8, as reported, supports the goal of comprehensive tax reform that “simplifies the tax code, increases fairness, generates economic growth, and improves the competitive position of U.S. businesses, if it is done in a way that is consistent with the revenue and progressivity goals” of the budget.50 President’s FY2015 Budget Proposal51 The President’s FY201540 Fiscal Reform in Budget Proposals Budget Resolution for FY201641 After going to a conference in April 2015, the House and Senate agreed on a budget resolution (S.Con.Res. 11) for FY2016. As is required of a budget resolution, S.Con.Res. 11 includes enforceable aggregate levels of revenue for FY2016. Additionally, the budget resolution demonstrates some support for congressional action on tax reform.42 Specifically, the resolution includes: • A deficit-neutral reserve fund in the Senate for legislation related to tax reform.43 Congress frequently includes “reserve funds” in the budget resolution. Such provisions provide the chairs of the House or Senate Budget Committees the authority to adjust the budgetary allocations, aggregates, and levels included in the budget resolution in the future if certain conditions are met. Typically these conditions consist of legislation dealing with a particular policy being reported by the appropriate committee or an amendment dealing with that policy being offered on the floor. Generally, the goal of such a reserve fund or adjustment is to allow certain policies to be considered on the floor without triggering a point of order for violating levels in the budget resolution.44 • Two policy statements expressing support in the House for tax reform.45 The first policy statement communicates support for fundamental tax reform that will foster economic growth and job creation, and the second states that tax reform should be enacted that (1) simplifies the tax code; (2) substantially lowers tax rates for individuals and consolidates the current seven individual income tax 38 The Tax Code Termination Act was introduced in the 112th Congress as H.R. 462 and the 113th Congress as H.R. 352. 39 For additional background on the “Buffett Rule,” see CRS Report R42043, An Analysis of the “Buffett Rule”. 40 The Paying a Fair Share Act of 2013 (S. 321/H.R. 766) was introduced earlier in in the 113th Congress. The Paying a Fair Share Act of 2012 (S. 2230/H.R. 3903) was also introduced in the 112th Congress. On April 16, 2012, the Senate voted not to invoke cloture on S. 2230. 41 This section was written by Megan S. Lynch, Analyst on Congress and the Legislative Process. 42 While a budget resolution is not designed to create revenue policy, it often communicates congressional support for subsequent enactment of certain legislation. 43 Sec. 4308. 44 For a detailed description of reserve funds, see CRS Report R43535, Provisions in the Bipartisan Budget Act of 2013 as an Alternative to a Traditional Budget Resolution, by Megan S. Lynch. 45 Sec. 6202 and Sec. 6204. Typically, such statements indicate that levels in the budget resolution assume such policies will be carried out. Congressional Research Service 11 Tax Reform in the 114th Congress: An Overview of Proposals brackets into a fewer number; (3) repeals the Alternative Minimum Tax; (4) reduces the corporate tax rate; and (5) transitions the tax code to a more competitive system of international taxation. The budget resolution also includes reconciliation instructions to several committees, including the committees with jurisdiction over tax reform, the Senate Finance Committee and the House Ways and Means Committee. These instructions trigger the reconciliation process by directing individual committees to develop and report legislation that would change laws within their jurisdiction to achieve a specified budgetary goal. During the final stages of the reconciliation process, the reported legislation is considered under expedited procedures in both the House and Senate. In responding to their reconciliation instructions, the Senate Finance Committee or the House Ways and Means Committee may choose to include in their reconciliation legislation changes to tax policy constituting tax reform.46 President’s FY2016 Budget Proposal47 The President’s FY2016 budget proposes a number of changes to current tax policy. Many of these changes were part of previous Obama Administration budget proposals. The President’s budget uses an adjusted baseline, which assumes that the American Opportunity Tax Credit (AOTC), Earned Income Tax Credit (ETIC), and Child Tax Credit (CTC) expansions that were extended through 2017 as part of the American Taxpayer Relief Act (ATRA; P.L. 112-240) are made permanent. The tax proposals in the President’s FY2015FY2016 budget are divided into two groups. The first group of proposals areis to be considered as part of a long-run revenue-neutral business tax reform. The revenues revenue raised from the base-broadening proposals in this section would pay for a reduction in the corporate tax rate to 28%, with an effective rate of 25% for manufacturing. The . The President’s FY2015 FY2016 budget also provides a one-time $150268 billion allowance for transportation infrastructure infrastructure spending, which would be paid for using unspecified revenues generated through the transition to a reformed business tax system. The business tax reform proposals in the President’s FY2015FY2016 budget include incentives for research, manufacturing, clean energy, and small business. The proposed modification and extension of the research and experimentation tax credit would cost $108.1127.7 billion between 20152016 and 20242026 according to the Administration’s estimates. The President’s FY2015FY2016 budget also proposes extending the increased expensing allowance for small businesses. Revenue-raising provisions in the President’s business tax reform include proposed changes to the U.S. international tax system, include changes in the tax treatment of derivatives and insurance products, repeal of certain tax incentives for fossil fuels, and repeal of last-in, first-out inventory accounting methods, among several other changes. Changes to the U.S. international tax system in this section would generate $276.3 billion between 2015 and 2024. Overall, this section of the President’s FY2015 budget would generate $248.3 billion for revenueneutral tax reform. 49 U.S. Congress, Senate Committee on the Budget, Committee Print to Accompany S.Con.Res. 8 Together with Additional Views and Minority Views, committee print, 113th Cong., 1st sess., March 2013, S.Rept. 113-12, p. 138. 50 Ibid., p. 138. 51 Also included as revenue-raising provisions are proposed changes to the U.S. international tax system. These changes include such things as a 19% minimum tax on foreign earnings; limitations on corporate inversions; interest deductions restrictions; Subpart F reforms; limits on 46 For more information on the reconciliation process, see CRS Report R41186, Reconciliation Directives: Components and Enforcement, by Megan S. Lynch. 47 For details, see Department of the Treasury, General Explanations of the Administration’s Fiscal Year 20152016 Revenue Proposals, Washtington, DC, March 2014Washington, DC, February 2015, http://www.treasury.gov/resource-center/tax-policy/Pages/ general_explanation.aspx. Congressional Research Service 1512 Tax Reform in the 113th Congress: An Overview of Proposals 114th Congress: An Overview of Proposals income shifting using intangible property transfers; and restrictions on hybrid arrangements to create stateless income. The Administration estimates the reforms to the U.S. international tax system would generate $238.3 billion between 2016 and 2025. Overall, the long-run revenueneutral business tax reform section of the President’s FY2016 budget would generate a reserve of $141.5 billion for revenue-neutral tax reform. The second group of revenue proposals includes additional provisions related to manufacturing and clean energy, certain incentives for infrastructure, a proposal to expand the Earned Income Tax Credit (EITC), and other individual-level tax incentives. The most costly proposal in this section is the proposed EITC expansion, at $59.7 billion between 2015 and 2024a new second-earner tax credit for working couples, at $89.0 billion between 2016 and 2025, followed by proposed expansion of the EITC, at $59.9 billion between 2016 and 2025. On net, the revenue proposals that are not related to baseline adjustments or reserved for revenueneutral business tax reform would raise $1,048.1 billion.5 trillion between 20152016 and 20242025. The provisions that that would generate the most additional revenue between 20152016 and 20242025 include capping the value of certain tax expenditures at 28% ($603.2 billion); imposing a 14% one-time tax on untaxed overseas earnings ($268.1 billion); increasing the maximum capital gains rate to 24.2% ($207.9 billion);the 28% cap on the value of certain tax expenditures ($598.1 billion); setting estate and gift tax parameters at 2009 levels ($118.3 billion); increased tobacco taxes ($78.2 billion); expansion and indexing of the federal unemployment tax act (FUTA) wage base ($59.0 billion); a financial crisis responsibility fee ($56.0 billion); and imposing a “Buffet Rule” or “Fair Share Tax” ($53.0 billion). Similar revenue-raising proposals appeared in previous Obama Administration budgets. Notably excluded from the President’s FY2015 Budget was a proposal which first appeared in the FY2014 Budget to re-index the tax code using chained-CPI.52 Tax Reform in the 112th Congress Tax reform legislation in the 112th Congress can be categorized as having been either (1) proposals to reform the current income tax system; or (2) proposals to eliminate the income tax system, replacing the income tax with some alternative revenue source. During the 112th Congress, a number of non-legislative tax reform proposals were put forth, including frameworks from the President, a tax reform plan outlined by the President’s Fiscal Commission, and tax reform as part of various budget proposals. While substantive revenue policy changes were enacted as part of the American Taxpayer Relief Act of 2012 (ATRA; P.L. 112-240),53 the 112th Congress did not complete action on comprehensive tax reform measures. Legislative Proposals Reform the Income Tax System The Bipartisan Tax Fairness and Simplification Act of 2011 (S. 727), introduced in the 112th Congress, would have reformed the current income tax base rather than changing to a consumption base. On the individual side, S. 727 proposed to eliminate most tax preferences (broadening the tax base), simplify the remaining preferences, and reduce the number of tax brackets to three. The corporate tax base would have been broadened by eliminating most corporate tax preferences, and corporate tax rates reduced to 24%. The Fair and Simple Tax Act of 2011 (H.R. 99) also proposed substantial modifications to the individual and corporate income taxes, reducing the number of individual tax brackets to three and reducing the corporate tax rate to 25%. H.R. 99 also proposed repealing the estate and gift taxes. Additional details on S. 727 and H.R. 99 are provided in the shaded text box below. 52 For background, see CRS Report R43347, Budgetary and Distributional Effects of Adopting the Chained CPI, by Donald J. Marples. 53 For more on the tax policies of ATRA, see CRS Report R42894, An Overview of the Tax Provisions in the American Taxpayer Relief Act of 2012, by Margot L. Crandall-Hollick. Congressional Research Service 16 Tax Reform in the 113th Congress: An Overview of Proposals Replace the Income Tax System Proposals to replace the income tax system with a consumption tax were also introduced in the 112th Congress. Specifically, the Fair Tax Act of 2011 (H.R. 25/S. 13) proposed a national retail sales tax to replace the income tax. This legislation was re-introduced in the 113th Congress.54 Reforming the Income Tax System: Legislative Proposals in the 112th Congress The Bipartisan Tax Fairness and Simplification Act of 2011 (S. 727) This bill had three stated purposes: (1) to make the federal individual income tax system simpler, fairer, and more transparent; (2) to make the federal corporate income tax rate a flat 24%, repeal the corporate alternative minimum tax, and eliminate special tax preferences that favor particular types of businesses or activities; and (3) to partially offset the federal budget deficit through the increased fiscal responsibility resulting from these reforms. The progressive individual income tax would have had three rates: 15%, 25%, and 35%. The individual alternative minimum tax would have been eliminated. The standard deduction would have almost tripled in value. While many deductions would have been eliminated, the bill would have included deductions for mortgage interest and charitable contributions. The bill would have permanently extended the enhancements of the child tax credit, the earned income tax credit, and the dependent care credit. The bill would have consolidated the three existing types of IRAs into a new retirement savings account, and a new lifetime savings account. A married couple would have been able to contribute up to $14,000 per year to tax-favored retirement and savings accounts. The corporate tax rate would have been 24% of taxable income. The corporate tax base would have been broadened by the elimination of numerous tax credits, deductions, and exclusions from income. The growth of small businesses would have been encouraged by allowing businesses with gross annual receipts of up to $1 million to permanently expense all equipment and inventory costs in a single year. The bill included numerous provisions to improve tax compliance. The Fair and Simple Tax Act of 2011 (H.R. 99) This bill proposed to establish an alternative determination of tax liability for individuals. A “simplified taxable income” would have been taxed at the rates of 10% on the first $40,000, 15% on the income over $40,000 but under $150,000, and 30% on the income over $150,000. Simplified taxable income would have equaled gross income less the sum of deductions for personal exemptions, the deduction allowed for the acquisition of indebtedness with respect to the principal residence, the deduction allowed for state and local income taxes, the deduction allowed for charitable giving, and the deduction allowed for medical expenses. The estate and gift taxes would have been repealed. The alternative minimum tax exemption amounts would have been indexed for inflation. The maximum corporate income tax rate would have been reduced to 25%. The 15% rate on dividends and capital gains of individuals would have been reduced to 10%. The basis for assets for purposes of determining capital gain or loss would have been indexed for inflation. This bill would have created tax-free accounts for retirement savings, lifetime savings, and lifetime skills. Examples of qualified life skills include assessments of skill levels, development of an individual employment plan, career planning, occupational skills training, on-the-job training, and entrepreneurial training. This bill would have repealed the adjusted gross income threshold in the medical care deduction for individuals under age 65 who have no employer health coverage. This bill would have made the research credit permanent. This bill would have repealed Title IX of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) relating to sunset of provisions. This bill would have repealed Section 107 of the Jobs and Growth Tax Relief Reconciliation Act of 2003 relating to application of EGTRRA sunset to this title. Other proposals to eliminate the income tax, replacing it with an alternative tax system, included the Debt Free America Act (H.R. 1125), the Simplified, Manageable, And Responsible Tax Act (S. 820) and the Freedom Flat Tax Act (H.R. 1040). H.R. 1040 would have repealed the individual income tax, instead raising revenues with a fee on transactions. S. 820 and H.R. 1040 would have enacted a “flat tax,” in the spirit of the Hall-Rabushka flat tax proposal.55 S. 820 54 Additional information on this proposal can be found above. For background information on the Hall-Rabushka flat tax proposal, see CRS Report 98-529, Flat Tax: An Overview (continued...) 55 Congressional Research Service 17 Tax Reform in the 113th Congress: An Overview of Proposals would have levied a flat tax that would replace the individual and corporate income taxes, as well as the estate and gift tax. The tax would have had two components: (1) a 17% tax on wages; and (2) a 17% cash-flow tax on businesses. H.R. 1040 would have allowed individuals and businesses to elect to be subject to a flat tax, as an alternative to the current tax system. The Flat Tax Act (H.R. 1040) and the Simplified, Manageable, And Responsible Tax Act (S. 820) have been reintroduced in the 113th Congress.56 Replacing the Income Tax System: Legislative Proposals in the 112th Congress The Debt Free America Act (H.R. 1125) The stated purposes of this act were to raise sufficient revenue from a fee on transactions to (1) eliminate the national debt within 10 years and phase out the individual income tax; and (2) provide incentives for private sector investment in capital goods, clean energy generation, and infrastructure development. In an effort to achieve these goals, this act proposed to impose a transaction fee of 1%, offset by a corresponding nonrefundable income tax credit, on every specialized transaction that uses a payment instrument, including any check, cash, credit card, transfer of stock, bonds, or other financial instrument. This act defined “specified transaction” to (1) exclude any deposit into a personal account of an individual and any transfer between accounts; and (2) include retail and wholesale sales, purchases of intermediate goods, and financial and intangible transactions. The fees would have been collected by the seller or financial institution servicing the transaction and would be paid to the U.S. Treasury. This act would have established in the legislative branch the Bipartisan Task Force for Responsible Fiscal Action, to review the fiscal imbalance of the federal government, identify factors affecting the long-term fiscal imbalance, analyze potential courses of action, and provide recommendations and legislative language to improve the long-term fiscal imbalance. This act would have repealed, after 2021, the individual income tax, refundable and nonrefundable personal tax credits, and the alternative minimum tax (AMT) on individuals. This act would have directed the Secretary of the Treasury to (1) prioritize the repayment of the national debt to protect the fiscal stability of the United States; and (2) study and report to Congress on the implementation of this act. The Fair Tax Act (H.R. 25/S. 13), the Freedom Flat Tax Act (H.R. 1040), and the Simplified, Manageable, And Responsible Tax (SMART) Act (S. 820) have been reintroduced in the 113th Congress and are summarized above (see “Tax Reform in the 113th Congress”). Other Tax Reform Legislative Proposals Legislation considered in the 112th Congress proposed to provide expedited consideration for comprehensive tax reform. The Pathway to Job Creation through a Simpler, Fairer Tax Code Act of 2012 (H.R. 6169) proposed to direct the chair of the House Committee on Ways and Means to introduce a tax reform bill by April 30, 2013. H.R. 6169 stated that this tax reform bill would achieve the following: (1) consolidate the six current individual income tax brackets into a maximum of two brackets (one of 10% and another not higher than 25%); (2) reduce the corporate income tax rate to not more than 25%; (3) repeal the alternative minimum tax (AMT); (4) broaden the tax base so that tax revenues comprise between 18% and 19% of Gross Domestic Product (GDP); and (5) reform the current system of foreign taxation. The bill also provided for its expedited consideration in the House of Representatives and the Senate. On August 2, 2012, H.R. 6169 passed in the House. This legislation also appeared as Title II to H.R. 8, a bill to extend certain tax relief provisions enacted in 2001 and 2003, and to provide for expedited consideration (...continued) of the Hall-Rabushka Proposal. 56 Additional information on these proposals can be found above. Congressional Research Service 18 Tax Reform in the 113th Congress: An Overview of Proposals of a bill providing for comprehensive tax relief, and for other purposes. Title I of H.R. 8 contained provisions to extend expiring tax provisions, an issue that was addressed by the enactment of the American Taxpayer Relief Act (ATRA; P.L. 112-240). Other Major Fiscal Reform Proposals House Budget Resolution and the Path to Prosperity The Path to Prosperity: A Blueprint for American Renewal was released alongside the House FY2013 budget resolution (H.Con.Res. 34). The Path to Prosperity found that a pro-growth tax reform would simplify the individual income tax system by eliminating “loopholes,” reduce the number of individual tax brackets to two (10% and 25%), repeals the Alternative Minimum Tax, maintains revenues at 18% to 19% of GDP, reduces the corporate tax rate to 25%, and shifts to a territorial international tax system. The Path to Prosperity called on leadership from the Committee on Ways and Means to advance tax reform. President’s Budget Previous budget proposals released by the Obama Administration contained substantive revenue policy proposals. Several of the tax policy changes outlined in the President’s FY2013 budget proposal were enacted as part of ATRA, including (1) extending and modifying the 2001 and 2003 tax reductions; (2) indexing the Alternative Minimum Tax (AMT) for inflation; and (3) setting the estate and gift tax parameters. Other revenue proposals in the President’s FY2013 budget proposal that were not enacted include (1) limiting itemized deductions and exclusions to 28% for high-income taxpayers; and (2) changes to international tax system including provisions targeting specific sources of tax avoidance associated with intangible assets (such as patents and trademarks) and modifying tax rules for calculating foreign tax credits and expenses related to foreign operations. Other Major Proposals A number of other major proposals in the 112th Congress put forward tax reform. Many of these proposals were focused on deficit reduction, with tax reform being a part of achieving that end. On April 13, 2011, President Obama gave a speech in which he presented his Framework for Shared Prosperity and Shared Fiscal Responsibility. In this framework, President Obama set a goal of reducing the deficit by $4 trillion in 12 years or less. To achieve deficit reduction, President Obama called on Congress to undertake comprehensive tax reform to result in a system that is fairer, with fewer “loopholes” and less complexity.57 Further, President Obama stated that the 2001/2003 “Bush” tax cuts should not be extended for the highest-income earners, an objective that was partially achieved through the enactment of ATRA. The President’s framework for deficit reduction followed the release of a report on deficit reduction by the National Commission on Fiscal Responsibility and Reform (Fiscal Commission) on December 1, 2010. The Fiscal Commission’s report, The Moment of Truth: Report of the 57 The White House, Office of the Press Secretary, Fact Sheet: The President’s Framework for Shared Prosperity and Shared Fiscal Responsibility, April 13, 2011, p. 1. Congressional Research Service 19 Tax Reform in the 113th Congress: An Overview of Proposals National Commission on Fiscal Responsibility and Reform, contained tax policy options that would have resulted in $1.1 trillion in additional revenues between 2012 and 2020.58 In addition to broadening the base by scaling back or eliminating tax expenditures, the Fiscal Commission’s revenue options included an increase in the gas tax, the use of chained-CPI, and a broadening of the wage tax base for Social Security. Making America a More Attractive Place to Hire and Invest: International Tax Reform, the first in what has become a series of discussion drafts put forward by the Committee on Ways and Means, was released October 26, 2011. This proposal would provide for a 95% exemption for dividends from foreign subsidiaries accompanied by provisions to limit profit shifting and other changes.59 In February 2012, the Obama Administration released The President’s Framework for Business Tax Reform.60 This framework outlined business tax reforms that would allow for lower tax rates through the elimination of tax expenditures and other base-broadening options. The Administration’s framework states that business and corporate tax reform should not add to the deficit. Specific proposals included in this framework included a special lower rate for manufacturing. In the international area, the plan discussed five elements: the allocation of interest for deferred income, a tax on excess intangibles, a minimum tax on foreign source income in low tax countries, disallowing a deduction for the cost of moving abroad, and providing a 20% credit for costs of moving an operation from abroad to the United States. Concluding Remarks The 113th Congress continues to work towards comprehensive tax reform. On February 26, 2014, House Committee on Ways and Means Chairman Dave Camp released the Tax Reform Act of 2014 as a discussion draft. This draft proposes substantial changes to the individual and corporate income tax systems, broadening the tax base and reducing statutory rates for most taxpayers. This discussion draft builds on earlier discussion drafts released by Chairman Camp addressing international tax, financial products, and small business tax reform. Under former Chairman Baucus, the Senate Committee on Finance also released several tax reform discussion drafts. These discussion drafts contain detailed policy proposals, and provide a foundation for substantive tax reform debate. While the Bipartisan Budget Act of 2013 did not contain tax reform recommendations, the House- and Senate-passed budget resolutions from earlier in 2013 did contain substantial tax policy reforms. The differences in the House and Senate budget resolutions, however, underscore a major challenge to enacting tax reform in the 113th Congress. The House-passed budget resolution calls for a revenue-neutral tax reform that substantially reduces both individual and corporate tax rates. The Senate-passed budget resolution calls for changes in revenue policies that 58 For additional information, see CRS Report R41641, Reducing the Budget Deficit: Tax Policy Options, by Molly F. Sherlock. 59 This proposal, as well as a bill submitted by Senator Enzi (S. 2091) and an alternative territorial reform that had been circulating for some time, are reviewed in CRS Report R42624, Moving to a Territorial Income Tax: Options and Challenges, by Jane G. Gravelle. 60 The President’s Framework for Business Tax Reform: A Joint Report by the White House and the Department of the Treasury, February 2012, http://www.treasury.gov/resource-center/tax-policy/Documents/The-Presidents-Frameworkfor-Business-Tax-Reform-02-22-2012.pdf. Congressional Research Service 20 Tax Reform in the 113th Congress: An Overview of Proposals would raise additional revenues. The President’s FY2015 budget proposal would use some portion of revenues for revenue-neutral tax reform, while using other revenues to pay for spending initiatives and reduce the deficit. Should tax reform result in additional revenues, whether those revenues should be used to reduce rates, reduce the deficit, or finance other government initiatives remains an unresolved issue. Author Contact Information Molly F. Sherlock Specialist in Public Finance msherlock@crs.loc.gov, 7-7797 Acknowledgments Portions of this report were originally authored by Jane G. Gravelle, Senior Specialist in Economic Policy and James Bickley, former Specialist in Public Finance. Congressional Research Service 21189.3 billion); imposing a fee on certain financial institutions ($111.8 billion); increasing tobacco taxes ($95.1 billion); conforming Self Employment Contributions Act (SECA) taxes for professional services businesses ($74.6 billion); and imposing a “Buffett Rule” or “Fair Share Tax” ($35.2 billion). Tax Reform in the 113th Congress Several major tax reform proposals were put forward by Members in the 113th Congress. While comprehensive tax reform was not enacted, proposals introduced in the 113th Congress may continue to inform the debate. Committee on Ways and Means and Committee on Finance The House Committee on Ways and Means worked towards comprehensive tax reform in the 113th Congress. On February 26, 2014, Chairman Camp released the draft Tax Reform Act of 2014.48 This proposal would have broadened the tax base and restructured statutory tax rates in both the individual and corporate income tax systems, changed the tax treatment of foreignsource income for U.S. multinational corporations, and made dozens of other changes to the federal tax system (additional details can be found in the shaded text box below). This reform built on earlier discussion drafts that had been released by Chairman Camp. Chairman Camp’s first tax reform discussion draft on international tax reform was released during the 112th Congress.49 A number of the international tax reform proposals in the Tax Reform Act of 2014 appeared in this earlier discussion draft. Similar to the earlier draft, the Tax Reform Act of 2014 would have allowed a 95% dividends received deduction for foreign business income. As a transition rule, the earlier draft had proposed a 5.25% tax on undistributed foreign 48 A full text of the draft and related materials can be found at http://tax.house.gov/. For the 2012 International Tax Reform discussion draft and related materials, see http://waysandmeans.house.gov/ taxreform/. 49 Congressional Research Service 13 Tax Reform in the 114th Congress: An Overview of Proposals earnings. The Tax Reform Act of 2014 also proposed taxing accumulated deferred foreign earnings, with a higher rate of 8.75% for cash, with other earnings held abroad taxed at 3.5%. In an effort to prevent tax base erosion, the Tax Reform Act of 2014 would have taxed foreign income generated by U.S. companies through the use of intangibles.50 Other proposals in the Tax Reform Act of 2014 were similar to proposals contained in Camp’s previous discussion drafts. Similar to proposals made in Camp’s January 24, 2013, financial products discussion draft,51 the Tax Reform Act of 2014 would have required that derivatives be marked-to-market at year-end, such that taxpayers would recognize income or losses. With respect to small businesses, the Tax Reform Act of 2014 did not include the broader reform option that had appeared in the March 12, 2013, small business discussion draft.52 Instead, the Tax Reform Act of 2014 proposed a number of changes to existing pass-through and partnership tax rules. Among the many proposals are provisions that would have taxed carried interest as ordinary income, changed rules related to partnership audits and adjustments, and restricted the use of publicly traded partnerships. Former Committee on Finance Chairman Max Baucus also released several discussion drafts related to tax reform. The former chairman released discussion drafts related to international tax reform, tax administration, cost recovery and accounting, and energy tax policy. The discussion drafts were released in addition to a series of tax reform options papers put forward by the committee earlier in 2013.53 Under Senator Baucus’s international tax reform proposal, passive and highly mobile forms of foreign-earned income would be taxed at the full U.S. rate, as would income earned from goods ultimately consumed in the United States. Two alternatives were put forth for taxing income earned from products and services sold abroad. “Option Y” would subject all foreign-earned income to a minimum tax, which the draft sets at 80% of the U.S. statutory rate. “Option Z” would tax 60% of foreign active business income at the U.S. rate. Similar to Chairman Camp’s international tax proposals, undistributed foreign earnings would be subject to a one-time tax. The Baucus discussion draft sets this rate at 20%. Reforms to cost recovery and accounting rules have also been put forward by former Chairman Baucus as a discussion draft. Proposed reforms would eliminate the modified accelerated cost recovery system (MACRS), enacting instead a system that uses asset pools and longer lives that more closely approximate economic depreciation. Certain intangibles, including research and experimentation as well as advertising expenditures, would be capitalized and amortized. Last-in, first-out (LIFO) inventory accounting rules would be repealed. Small-business expensing allowances would be increased such that more businesses would be allowed to use cash 50 Camp’s earlier discussion draft had included two other options for addressing profit shifting concerns. These options included (1) current taxation of foreign profits when income is earned from intangibles, income exceeds the normal rate of return, and income is earned in a low-tax country (this is referred to as President Obama’s “excess returns” proposal) or (2) tax income that is subject to an effective foreign tax rate below 10% unless it qualifies for a home country exception. For more on policy options for addressing corporate profit shifting, see CRS Report R40623, Tax Havens: International Tax Avoidance and Evasion, by Jane G. Gravelle. 51 For the Financial Productions discussion draft and related materials, see http://waysandmeans.house.gov/taxreform/. 52 For the Small Business discussion draft and related materials, see http://waysandmeans.house.gov/taxreform/. 53 The Senate Finance Committee’s tax reform options papers are available online at http://www.finance.senate.gov/ issue/?id=6c61b1e9-7203-4af0-b356-357388612063. Congressional Research Service 14 Tax Reform in the 114th Congress: An Overview of Proposals accounting. A number of similar proposals appear in the Tax Reform Act of 2014, discussed above. Former Chairman Baucus has also released a discussion draft related to tax administration and energy tax reform. This tax administration draft contained several proposals designed to reduce the tax gap, enacting additional data reporting requirements and anti-fraud provisions. The energy tax reform discussion draft proposes clean energy production and investment tax credits designed to replace existing incentives for renewables and other clean electricity resources (e.g., nuclear, carbon capture, and sequestration). These credits would be available for the long term, but are designed to begin phasing out once the annual average greenhouse gas emissions rate falls below a specified threshold. The proposal also contains a new tax credit for clean transportation fuels. Legislative Proposals Reform the Income Tax System The Tax Reform Act of 2014 (H.R. 1) was introduced late in the 113th Congress. This legislation was preceded by several tax reform discussion drafts, discussed above. Key provisions of this comprehensive legislation are provided in the text box below. Reforming the Income Tax System: Legislative Proposals in the 113th Congress The Tax Reform Act of 2014 (H.R. 1)54 This proposal would have made substantial changes to the current federal tax system, modifying individual, corporate, and business income taxes, while also changing the tax treatment of multinational corporations. The proposal would also have made a number of changes related to the treatment of tax-exempt entities, tax administration and compliance, and excise taxes. Individual Income Tax Under the proposal, there would have been two regular income tax brackets, with rates of 10% and 25%. A third bracket would have applied to an alternative definition of income, making for a top statutory rate of 35%. The 35% bracket results from a 10% tax on modified adjusted gross income (MAGI) above certain income thresholds ($400,000 for single filers; $450,000 for joint filers (adjusted for inflation)). The 10% bracket would have phased-out for certain higher-income taxpayers. Brackets would have been adjusted for inflation using chained-CPI. Dividends and capital gains would have been taxed as ordinary income, but 40% of net capital gains and qualified dividends would have been excluded from taxable income. The proposal would have also repealed the Alternative Minimum Tax (AMT). Other substantial changes to the structure of the individual income tax system included an elimination of personal exemptions and an increase in the standard deduction. The standard deduction would have been set at $22,000 for joint filers, and $11,000 for other individual filers. An additional standard deduction of $5,500 would have been available for single filers with at least one child. The standard deduction would have been phased-out for certain higher-income taxpayers. The proposal would have also modified or eliminated a number of individual income tax credits, deductions, and other provisions. Major changes included eliminating the deduction for state and local tax payments; scaling back the mortgage interest deduction and earned income tax credit (EITC); modification of the charitable deduction and education incentives; and changes in 401(k) and Roth IRA retirement savings vehicles. 54 A full section-by-section summary of the Tax Reform Act of 2014, as prepared by the staff of the House Committee on Ways and Means, can be found at http://waysandmeans.house.gov/uploadedfiles/ ways_and_means_section_by_section_summary_final_022614.pdf. Congressional Research Service 15 Tax Reform in the 114th Congress: An Overview of Proposals Corporate and Business Income Tax All C corporations would have been taxed at a top statutory rate of 25% under the proposal, with the statutory rate reduction phased in through 2019. Other business income, including income earned by S corporations, partnerships, and sole proprietorships, would have been taxed through the individual income tax system. Similar to the individual system, the proposal would have modified or eliminated a number of corporate and business income tax credits, deductions, and other provisions. Among the proposed changes were the elimination of the modified accelerated cost recovery system (MACRS); requiring amortization of research and experimental expenditures and advertising expenses; a modification of the net operating loss (NOL) deduction; a phased-out repeal of the Section 199 domestic production activities deduction; and repeal of the last-in, first-out (LIFO) method of inventory accounting. The corporate AMT is also repealed. Taxation of Multinationals The proposal would have made significant changes to the tax treatment of foreign source income earned by U.S. multinational corporations. Specifically, it proposed adopting a 95% exemption for dividends received by U.S. corporations from foreign subsidiaries. Subpart F rules would have been modified, providing broad taxation of intangible income of foreign subsidiaries when earned, with foreign intangible income subject to a 15% rate (once fully phased in). The proposal also included “thin capitalization” rules that would have restricted domestic interest deductions. There would have also been a one-time tax on previously untaxed earnings and profits (E&P) of foreign subsidiaries of U.S. corporations. E&P retained as cash would have been taxed at 8.75% while any remaining E&P would have been taxed at 3.5%. Other Changes Numerous changes were also proposed with respect to tax-exempt entities, administration and compliance, and excise taxes. Among the proposed changes was an excise tax on systemically important financial institutions. Additional legislative proposals in the 113th Congress would have reformed the current income tax system. Specifically, the Family Fairness and Opportunity Tax Reform Act (S. 1616) proposed substantive changes to the current income tax. Specifically, S. 1616 would have consolidated the tax brackets, repealed the alternative minimum tax (AMT), provided an additional child tax credit and personal credit, eliminated the standard deduction and most itemized deductions (retaining, with modifications, the deduction for mortgage interest and charitable contributions), in addition to making other changes to the tax code. Other legislation, such as the Flat Tax Rate Act (H.R. 5882), would have imposed a single income tax rate of 15%. Replace the Income Tax System Several proposals were introduced in the 113th Congress that would have replaced the income tax system with some alternative form of taxation at the federal level. The Fair Tax Act of 2013 (H.R. 25/S. 122) would have repealed the individual income tax, the corporate income tax, all payroll taxes, the self-employment tax, and the estate and gift taxes. These taxes would have effectively been replaced with a national retail sales tax. Thus, under H.R. 25/S. 122, the current federal tax system, based on taxing income, would have been replaced with a system that taxes consumption. The Fair Tax Act was reintroduced in the 114th Congress, and is discussed above. The Flat Tax Act (H.R. 1040) proposed to allow taxpayers to elect to be subject to a flat tax, as an alternative to the current tax system. Individuals and businesses electing a flat tax would pay a flat rate of 19% for the first two years, and a rate of 17% thereafter. The Simplified, Manageable, And Responsible Tax (SMART) Act (S. 173) also proposed a flat tax of 17% on individuals’ wages and business taxable income. The flat tax systems proposed in H.R. 1040 and S. 173 were Congressional Research Service 16 Tax Reform in the 114th Congress: An Overview of Proposals structurally similar to the Hall-Rabushka flat tax proposal.55 Both of these proposals were reintroduced in the 114th Congress, and are discussed above. The American Growth & Tax Reform Act of 2013 (H.R. 2393) would have required the Secretary of the Treasury to submit to Congress a legislative proposal for a progressive consumption tax. H.R. 2393 would have been designed to eliminate the public debt outstanding. Specifically, the Treasury would have been directed to provide rates and details on a progressive consumption tax to eliminate the public debt under scenarios in which (1) the consumption tax in addition to other taxes; (2) the consumption tax would replace the individual income tax; and (3) the consumption tax would replace the corporate income tax. The Progressive Consumption Tax Act of 2014 (S. 3005) proposed a 10% consumption tax on most goods and services (structured as a value-added tax (VAT)).56 While the legislation would not fully replace the income tax system, it would have reduced individual and corporate income tax rates to a maximum rate of 28% and 17%, respectively. The legislation also would have broadened the income tax base, eliminating a number of individual tax expenditures. Further, the legislation would have provided an allowance of $50,000 for single filers ($100,000 for married filing jointly), that would have effectively exempted most taxpayers from the individual income tax. Refundable tax credits for families would effectively be replaced with rebates to offset consumption tax liability for lower-income families. Other Tax Reform Proposals Legislation introduced in the 113th Congress would have eliminated the existing tax code, leaving it to Congress to design a new tax code. The Tax Code Termination Act (H.R. 352) would have terminated the Internal Revenue Code, and declares that any new tax system should be a simple and fair system that met a set of criteria, as noted above. The End Wasteful Tax Loopholes Act (S. 8) proposes to express the sense of the Senate that Congress should enact legislation to (1) eliminate wasteful tax loopholes; (2) eliminate corporate tax loopholes and wasteful tax breaks for special interests; (3) enhance tax fairness by reforming or eliminating tax breaks that provide excessive benefits to millionaires and billionaires; (4) crack down on tax cheaters and close the tax gap; (5) use the revenue saved by curtailing tax loopholes to reduce the deficit and reform the federal tax code; (6) address provisions in the tax code that make it more profitable for companies to create jobs overseas than in the United States; and (7) reform the tax code in a manner that promotes job creation, competitiveness, and economic growth. The Paying a Fair Share Act of 2013 (H.R. 766/S. 321) would have imposed a 30% minimum effective tax rate on taxpayers reporting at least $1 million in income. This legislation was reintroduced in the 114th Congress, as noted above. 55 For background information on the Hall-Rabushka flat tax proposal, see CRS Report 98-529, Flat Tax: An Overview of the Hall-Rabushka Proposal. 56 Further discussion of S. 3005 can be found in William R. Davis, “Cardin’s VAT Bill: Driving Debate Or Another Back-Seat Attempt,” Tax Notes, January 19, 2015, pp. 329-334. Congressional Research Service 17 Tax Reform in the 114th Congress: An Overview of Proposals Fiscal Reform in Budget Proposals General instructions for tax reform were not included in the Bipartisan Budget Act of 2013. Section 114 of the act, did, however, provide several deficit-neutral tax reform-related reserve funds for Senate budget enforcement.57 The earlier Senate- and House-passed budget resolutions recommend substantial changes in current tax law. The House budget resolution (H.Con.Res. 25) called for revenue-neutral comprehensive tax reform, while the Senate budget resolution (S.Con.Res. 8) instructed the Senate Finance Committee to draft revenue legislation that would reduce the deficit by $975 billion over the 2013 to 2023 budget window.58 House and Senate Budget Resolutions The House budget resolution (H.Con.Res. 25) was passed on March 21, 2013.59 The accompanying H.Rept. 113-17 stated that H.Con.Res. 25 sought to grow the economy through tax reform.60 Specifically, tax reform as outlined in H.Con.Res. 25, would have achieved the following objectives: (1) simplify the tax code to make it fairer to American families and businesses; (2) reduce the amount of time and resources necessary to comply with tax laws; (3) substantially lower tax rates for individuals, with a goal of achieving a top individual rate of 25%; (4) consolidate the current seven individual-income-tax brackets into two brackets with a first bracket of 10%; (5) repeal the Alternative Minimum Tax; (6) reduce the corporate tax rate to 25%; and (7) transition the tax code to a more competitive system of international taxation.61 H.Con.Res. 25 stated that revenue-neutral tax reform that meets the objectives listed above should have been reported by the Committee on Ways and Means to the House by December 31, 2013. This would have allowed Congress time to enact comprehensive tax reform during FY2014. The tax reform efforts that were being undertaken at the time by the Committee on Ways and Means are discussed in greater detail elsewhere in this report (see “Committee on Ways and Means” above). The Senate budget resolution (S.Con.Res. 8) was passed on March 23, 2013. This budget resolution stated that by October 1, 2013, the Senate Committee on Finance was to report revenue legislation that would have raised $975 billion between fiscal years 2013 and 2023. The committee report accompanying S.Con.Res. 8 stated that these additional revenues would result 57 For more information on reserve funds in budget resolutions, see CRS Report R40472, The Budget Resolution and Spending Legislation, by Megan S. Lynch. 58 Additional legislative action is required to enact any policy proposals from a budget resolution. 59 The Bipartisan Budget Act of 2013 (BBA; P.L. 113-67) included language stating that, in lieu of a budget resolution for FY2014 and FY2015, the Chairs of the House and Senate Budget Committees were permitted to each file a statement of budgetary levels in the Congressional Record, which would have effect in their respective chamber as if the levels had been included in a budget resolution. The Senate, therefore, did not consider a budget resolution for FY2015, and instead, on May 5, 2014, the Senate Budget Committee Chairwoman filed levels pursuant to the BBA, which had effect in the Senate. On April 29, the House Budget Committee Chairman filed such levels pursuant to the BBA, which had effect in the House. While the BBA permitted such levels to be filed, it did not preclude either House from otherwise considering a budget resolution. Subsequent to the Budget Committee Chairman filing such levels, the House, on March 10, 2014, the House passed a budget resolution for FY2015 (H.Con.Res. 96). 60 U.S. Congress, House Committee on the Budget, Concurrent Resolution on the Budget - Fiscal Year 2014, Report to Accompany H.Con.Res. 25, 113th Cong., 1st sess., March 15, 2013, H.Rept. 113-17, p. 6. 61 Ibid., p. 7. Congressional Research Service 18 Tax Reform in the 114th Congress: An Overview of Proposals from tax increases on “the wealthiest Americans and biggest corporations.”62 The committee report also noted that S.Con.Res. 8, as reported, supported the goal of comprehensive tax reform that “simplifies the tax code, increases fairness, generates economic growth, and improves the competitive position of U.S. businesses, if it is done in a way that is consistent with the revenue and progressivity goals” of the budget.63 President’s FY2015 Budget Proposal64 The President’s FY2015 budget proposed a number of changes to current tax policy. Many of these changes were part of previous Obama Administration budget proposals. The President’s budget used an adjusted baseline, which assumed that the American Opportunity Tax Credit (AOTC), Earned Income Tax Credit (ETIC), and Child Tax Credit (CTC) expansions that were extended through 2017 as part of the American Taxpayer Relief Act (ATRA; P.L. 112-240) are made permanent. The tax proposals in the President’s FY2015 budget were divided into two groups. The first group of proposals was to be considered as part of a revenue-neutral business tax reform. The revenues raised from proposals in this section would have paid for a reduction in the corporate tax rate. The President’s FY2015 budget also provided a one-time $150 billion allowance for transportation infrastructure spending, which would have been paid for using unspecified revenues generated through the transition to a reformed business tax system. The business tax reform proposals in the President’s FY2015 budget included incentives for research, manufacturing, clean energy, and small business. The proposed modification and extension of the research and experimentation tax credit would have cost $108.1 billion between 2015 and 2024. The President’s FY2015 budget also proposed extending the increased expensing allowance for small businesses. Revenue-raising provisions in the President’s business tax reform included proposed changes to the U.S. international tax system, changes in the tax treatment of derivatives and insurance products, repeal of certain tax incentives for fossil fuels, and repeal of last-in, first-out inventory accounting methods, among several other changes. Changes to the U.S. international tax system in this section would have generated $276.3 billion between 2015 and 2024. Overall, this section of the President’s FY2015 budget would have generated $248.3 billion for revenue-neutral tax reform. The second group of revenue proposals included additional provisions related to manufacturing and clean energy, certain incentives for infrastructure, a proposal to expand the EITC, and other individual-level tax incentives. The most costly proposal in this section was the proposed EITC expansion, at $59.7 billion between 2015 and 2024. On net, the revenue proposals that were related to baseline adjustments or reserved for revenueneutral business tax reform would have raised $1,048.1 billion between 2015 and 2024. The provisions that would have generated the most additional revenue between 2015 and 2024 62 U.S. Congress, Senate Committee on the Budget, Committee Print to Accompany S.Con.Res. 8 Together with Additional Views and Minority Views, committee print, 113th Cong., 1st sess., March 2013, S.Rept. 113-12, p. 138. 63 Ibid., p. 138. 64 For details, see Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2015 Revenue Proposals, Washtington, DC, March 2014, http://www.treasury.gov/resource-center/tax-policy/Pages/ general_explanation.aspx. Congressional Research Service 19 Tax Reform in the 114th Congress: An Overview of Proposals included the 28% cap on the value of certain tax expenditures ($598.1 billion); setting estate and gift tax parameters at 2009 levels ($118.3 billion); increased tobacco taxes ($78.2 billion); expansion and indexing of the federal unemployment tax act (FUTA) wage base ($59.0 billion); a financial crisis responsibility fee ($56.0 billion); and imposing a “Buffett Rule” or “Fair Share Tax” ($53.0 billion). Similar revenue-raising proposals appeared in previous Obama Administration budgets. Notably excluded from the President’s FY2015 Budget was a proposal which first appeared in the FY2014 Budget to re-index the tax code using chained-CPI.65 Concluding Remarks Tax reform continues to be of interest in the 114th Congress. The Tax Reform Act of 2014, introduced late in the 113th Congress, continues to inform the debate. One open question is whether Congress will choose to pursue comprehensive tax reform that simultaneously addresses the individual and corporate income tax systems, including multinational corporations. An alternative may be to look at international or business-only reforms. The extent to which such reforms are feasible and would achieve the policy objectives of tax reform remains an open question. Another open question is whether the federal tax system should continue to rely on taxing income as the primary source of revenue. Several tax reform proposals introduced in the 114th Congress would tend to shift the tax system away from taxing income, taxing consumption instead. Author Contact Information Molly F. Sherlock Coordinator of Division Research and Specialist msherlock@crs.loc.gov, 7-7797 Mark P. Keightley Specialist in Economics mkeightley@crs.loc.gov, 7-1049 Acknowledgments The authors would like to thank Megan Lynch, Analyst on Congress and the Legislative Process, for her contributions to this report. Portions of this report were originally authored by Jane G. Gravelle, Senior Specialist in Economic Policy and James Bickley, former Specialist in Public Finance. 65 For background, see CRS Report R43347, Budgetary and Distributional Effects of Adopting the Chained CPI, by Donald J. Marples. Congressional Research Service 20