March 5, 2014
The Tax Reform Act of 2014
Background and Proposed Changes
Context. On February 26, 2014, House Committee on
Ways and Means Chairman Dave Camp introduced the Tax
Reform Act of 2014 as a discussion draft. This
comprehensive draft builds on earlier discussion drafts
released by Chairman Camp, which had addressed
international tax, financial products, and small business.
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). The 10% bracket is phased-out for certain higherincome 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. A
number of tax preferences, including standard and itemized
deductions (except charitable contributions), could only be
taken against the 25% bracket.
The Tax Reform Act of 2014 would reduce average
and effective marginal tax rates for most individual
earned by S corporations, partnerships, and sole
proprietorships, would be taxed through the individual
income tax system. The 35% bracket in the individual
system would not apply to qualified domestic
manufacturing income. 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);
amortization of research and experimental expenditures and
advertising expenses; modification of the net operating loss
(NOL) deduction; 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 and repeal of the medical device tax.
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); modifying the charitable deduction and education
incentives; and making changes in 401(k) and Roth IRA
retirement savings vehicles.
The Joint Committee on Taxation (JCT) has estimated that
the Tax Reform Act of 2014 would increase federal
revenues by $3.0 billion over the 2014 to 2023 budget
window (see Table 1). Overall, revenues collected from
individuals would be expected to decrease by about $588.4
billion between 2014 and 2023 (including AMT repeal).
Revenues collected from businesses, including
multinationals, would be expected to increase by $520.5
billion over the same time frame. The new tax on financial
institutions would also raise additional revenues.
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
Revenue Stability. While the JCT estimates indicate the
proposal would be roughly revenue-neutral over the 10-year
budget window, the proposal could result in reduced tax
revenues in the longer-term. Some of the major revenue-
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The Tax Reform Act of 2014
raising provisions are one-time sources, including the tax
on deferred foreign income and the changes in rules related
to Roth IRA accounts. The proposed changes to
depreciation are also likely to raise less revenue over the
long-term than in the 10-year budget window. Reduced
corporate tax rates are also phased-in gradually, limiting
revenue losses in the first 10 years.
Change in Tax Burden. According to JCT estimates, once
the policies are fully implemented, federal taxes paid would
decrease for all except the $500,000 to $1,000,000 income
group (see Figure 1). By 2023, taxpayers in lower income
categories would experience larger percentage decreases in
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
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.
Using a variety of modeling techniques, the JCT’s
macroeconomic analysis of the base-broadening, ratereducing 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, email@example.com, 7-7797
Source: Joint Committee on Taxation, JCX-20-14. Table created by
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