The Tax Reform Act of 2014

The Tax Reform Act of 2014

March 5, 2014
The Tax Reform Act of 2014
earned by S corporations, partnerships, and sole
Background and Proposed Changes
proprietorships, would be taxed through the individual
income tax system. The 35% bracket in the individual
Context. On February 26, 2014, House Committee on
system would not apply to qualified domestic
Ways and Means Chairman Dave Camp introduced the Tax
manufacturing income. Similar to the individual system, the
Reform Act of 2014 as a discussion draft. This
proposal would modify or eliminate a number of corporate
comprehensive draft builds on earlier discussion drafts
and business income tax credits, deductions, and other
released by Chairman Camp, which had addressed
provisions. Among the changes are elimination of the
international tax, financial products, and small business.
modified accelerated cost recovery system (MACRS);
amortization of research and experimental expenditures and
Individual Income Tax. Under the proposal, there would
advertising expenses; modification of the net operating loss
be two regular income tax brackets, with rates of 10% and
(NOL) deduction; phased-out repeal of the Section 199
25%. A third bracket would apply to an alternative
domestic production activities deduction; and repeal of the
definition of income, making for a top statutory rate of
last-in, first-out (LIFO) method of inventory accounting.
35%. The 35% bracket results from a 10% tax on modified
The corporate AMT is also repealed.
adjusted gross income (MAGI) above certain income
thresholds ($400,000 for single filers; $450,000 for joint
Taxation of Multinationals. The proposal would make
filers). The 10% bracket is phased-out for certain higher-
significant changes to the tax treatment of foreign-source
income taxpayers. Brackets would be adjusted for inflation
income earned by U.S. multinational corporations.
using chained-CPI. Dividends and capital gains would be
Specifically, the proposal would adopt a 95% exemption for
taxed as ordinary income, but 40% of net capital gains and
dividends received by U.S. corporations from foreign
qualified dividends would be excluded from taxable
subsidiaries. Subpart F rules would be modified, providing
income. The proposal would also repeal the Alternative
broad taxation of intangible income of foreign subsidiaries
Minimum Tax (AMT).
when earned, with foreign intangible income subject to a
15% rate (once fully phased in). The proposal also includes
Other substantial changes to the structure of the individual
“thin capitalization” rules that restrict domestic interest
income tax system include an elimination of personal
deductions. There would also be a one-time tax on
exemptions and an increase in the standard deduction. The
previously untaxed earnings and profits (E&P) of foreign
standard deduction would be set at $22,000 for joint filers,
subsidiaries of U.S. corporations. E&P retained as cash
and $11,000 for other individual filers. An additional
would be taxed at 8.75%, while any remaining E&P would
standard deduction of $5,500 would be available for single
be taxed at 3.5%.
filers with at least one child. The standard deduction would
be phased-out for certain higher-income taxpayers. A
Other Changes. Numerous changes were also proposed
number of tax preferences, including standard and itemized
with respect to tax-exempt entities, administration and
deductions (except charitable contributions), could only be
compliance, and excise taxes. Among the proposed changes
taken against the 25% bracket.
is an excise tax on systemically important financial
institutions and repeal of the medical device tax.
The Tax Reform Act of 2014 would reduce average
and effective marginal tax rates for most individual
Revenue Effects
taxpayers.
The Joint Committee on Taxation (JCT) has estimated that
the Tax Reform Act of 2014 would increase federal
The proposal would also modify or eliminate a number of
revenues by $3.0 billion over the 2014 to 2023 budget
individual income tax credits, deductions, and other
window (see Table 1). Overall, revenues collected from
provisions. Major changes include eliminating the
individuals would be expected to decrease by about $588.4
deduction for state and local tax payments; scaling back the
billion between 2014 and 2023 (including AMT repeal).
mortgage interest deduction and earned income tax credit
Revenues collected from businesses, including
(EITC); modifying the charitable deduction and education
multinationals, would be expected to increase by $520.5
incentives; and making changes in 401(k) and Roth IRA
billion over the same time frame. The new tax on financial
retirement savings vehicles.
institutions would also raise additional revenues.

Corporate and Business Income Tax. All C corporations
Revenue Stability. While the JCT estimates indicate the
would be taxed at a top statutory rate of 25% under the
proposal would be roughly revenue-neutral over the 10-year
proposal, with the statutory rate reduction phased in
budget window, the proposal could result in reduced tax
through 2019. Other business income, including income
revenues in the longer-term. Some of the major revenue-
www.crs.gov | 7-5700

The Tax Reform Act of 2014
raising provisions are one-time sources, including the tax
Distributional Effects
on deferred foreign income and the changes in rules related
to Roth IRA accounts. The proposed changes to
Change in Tax Burden. According to JCT estimates, once
depreciation are also likely to raise less revenue over the
the policies are fully implemented, federal taxes paid would
long-term than in the 10-year budget window. Reduced
decrease for all except the $500,000 to $1,000,000 income
corporate tax rates are also phased-in gradually, limiting
group (see Figure 1). By 2023, taxpayers in lower income
revenue losses in the first 10 years.
categories would experience larger percentage decreases in

federal taxes.
Table 1. Estimated Revenue Effects (billions)
As the policies are phased-in, JCT estimates that federal
taxes would initially increase for those in the lowest and the
highest income categories. By 2017, federal taxes would
decrease, on average, for all income categories of less than
$100,000. In 2017, all income categories of $100,000 or
more would experience an increase in federal taxes. It is not
until 2023 that the JCT estimates that federal taxes would
decrease for the income category of $1,000,000 and above.
Figure 1. Change in Federal Taxes, 2023

Source: Joint Committee on Taxation, JCX-21-14. Figure created by
CRS.
A decreased federal tax liability on average within an
income category does not necessarily mean that federal
taxes would fall for all taxpayers in a given income
category. Further, some taxpayers may face increased
marginal effective tax rates, given the various surtaxes and
phase-outs in the propsoal.
Macroeconomic Analysis
Using a variety of modeling techniques, the JCT’s
macroeconomic analysis of the base-broadening, rate-
reducing tax reform proposal found the following:
• GDP is projected to grow by an additional 0.1% to 1.6%
during the 10-year budget period.
• Labor supply, private employment, and consumption are
all projected to increase. These effects are driven by
reduced effective marginal tax rates on labor and
increased after-tax incomes.
• Reduced after-tax returns to investment may lead to
reduced business investment in capital stock over time.

Molly F. Sherlock, msherlock@crs.loc.gov, 7-7797

Source: Joint Committee on Taxation, JCX-20-14. Table created by
IF00011
CRS.
www.crs.gov | 7-5700

Document Outline

Background and Proposed Changes

Revenue Effects

Macroeconomic Analysis

Using a variety of modeling techniques, the JCT’s macroeconomic analysis of the base-broadening, rate-reducing tax reform proposal found the following:

 GDP is projected to grow by an additional 0.1% to 1.6% during the 10-year budget period.

 Labor supply, private employment, and consumption are all projected to increase. These effects are driven by reduced effective marginal tax rates on labor and increased after-tax incomes.

 Reduced after-tax returns to investment may lead to reduced business investment in capital stock over time.