Late last month, Speaker of the House Paul Ryan released the tax reform component of his “A Better Way” task force project undertaken in collaboration with GOP House members. It deserves serious attention.
The real importance of this proposal is the structural change it contemplates: specifically, moving the tax system more toward a consumption base and changing the reach of the corporate tax.
Here are the key points:
- Moving toward a business cash flow tax The proposal calls for an immediate write-off (expensing) of business investment combined with an elimination of deductions for net interest (special rules on interest deduction for financial services).
- Territorial and Border Adjustability The task force calls for a “destination-basis” corporate tax system, meaning the reach of the corporate tax would be territorial and exports would not be taxed while imports would be subject to taxation. Current World Trade Organization rules allow border adjustability for Value Added Taxes but not for corporate income taxes. Speaker Ryan and his colleagues believe that moving toward a cash-flow method for taxing business income would make border adjustability possible under WTO rules.
- Repatriation Holiday Existing earnings accumulated overseas would be repatriated subject to a low tax rate payable over eight years.
- Treatment of Pass-Throughs For C corporations the top rate under the reform regime would be 20%. To solve the inevitable problem of the tax treatment of S corporations, partnerships, etc., the task force would distinguish between “reasonable compensation to owner-operators” which would be deductible by the business and payable by the recipient and active business income which would be taxed at 25 percent at the individual level. level. Obviously this would require careful rulemaking.
- Double taxation of corporate income Unlike Senate Finance’s embrace of corporate tax integration, the House proposal would mitigate the double taxation effect by allowing individuals and families to deduct half their net capital gains, dividends, and interest income.
There is much more to the task force proposal including suggested reform of the IRS, the development of a simplified “postcard” tax form for individuals with a large standard deduction (or, alternatively use of the mortgage interest and charitable deductions), elimination of the individual AMT, and repeal of the estate and generation-skipping transfer taxes.
Just as Kemp-Roth and similar tax proposals provided the intellectual framework for the tax reform of 1986 without fully anticipating the details, Ryan’s recommendations should set the boundaries for future tax reform, perhaps as early as next year. Compared to what we have heard from the two Presidential candidates, the task force’s ideas have the added advantage of being serious. It would be great if House Democrats would attempt a similar contribution to the policy mix on many of the same topics.