The Tax Reform Act of 2014

The Tax Reform Act of 2014

March 5, 2014
The Tax Reform Act of 2014
Background and Proposed Changes
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The corporate AMT is also repealed.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
Revenue Effects
and effective marginal tax rates for most individual
The Joint Committee on Taxation (JCT) has estimated that
taxpayers.
the Tax Reform Act of 2014 would increase federal
revenues by $3.0 billion over the 2014 to 2023 budget
The proposal would also modify or eliminate a number of
window (see Table 1). Overall, revenues collected from
individual income tax credits, deductions, and other
individuals would be expected to decrease by about $588.4
provisions. Major changes include eliminating the
billion between 2014 and 2023 (including AMT repeal).
deduction for state and local tax payments; scaling back the
Revenues collected from businesses, including
mortgage interest deduction and earned income tax credit
multinationals, would be expected to increase by $520.5
(EITC); modifying the charitable deduction and education
billion over the same time frame. The new tax on financial
incentives; and making changes in 401(k) and Roth IRA
institutions would also raise additional revenues.
retirement savings vehicles.
Revenue Stability. While the JCT estimates indicate the
Corporate and Business Income Tax. All C corporations
proposal would be roughly revenue-neutral over the 10-year
would be taxed at a top statutory rate of 25% under the
budget window, the proposal could result in reduced tax
proposal, with the statutory rate reduction phased in
revenues in the longer-term. Some of the major revenue-
through 2019. Other business income, including income
raising provisions are one-time sources, including the tax
earned by S corporations, partnerships, and sole
on deferred foreign income and the changes in rules related
proprietorships, would be taxed through the individual
https://crsreports.congress.gov

link to page 2

The Tax Reform Act of 2014
to Roth IRA accounts. The proposed changes to
Distributional Effects
depreciation are also likely to raise less revenue over the
Change in Tax Burden. According to JCT estimates, once
long-term than in the 10-year budget window. Reduced
the policies are fully implemented, federal taxes paid would
corporate tax rates are also phased-in gradually, limiting
decrease for all except the $500,000 to $1,000,000 income
revenue losses in the first 10 years.
group (see Figure 1). By 2023, taxpayers in lower income
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, Specialist in Public Finance
IF10201

Source: Joint Committee on Taxation, JCX-20-14. Table created by
CRS.
https://crsreports.congress.gov

The Tax Reform Act of 2014

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.

https://crsreports.congress.gov | IF10201 · VERSION 2 · NEW