Last month in The Taxpayer's Tab, NTU Foundation covered some of the tax reform plans that Congress has recently proposed. Most policymakers agree that the current system is too complex and difficult to enforce fairly, but there's no clear consensus on the best way to correct the problem. Proposed solutions range from repealing the current system in its entirety and starting from scratch (see: the Fair Tax Act, the SMART Act, and the Tax Code Termination Act), to modifying existing provisions to make them more efficient (as proposed in Rep. David Camp's draft legislation during the previous Congress).
Now, Senators Marco Rubio (R-FL) and Mike Lee (R-UT) have introduced their own proposal, dubbed the Economic Growth and Family Fairness Tax Reform Plan. In a white paper released by their offices, the Senators stated that the current system "taxes too
much, taxes unfairly, and stifles economic opportunity for American families, businesses, and individuals." As such, the Rubio-Lee plan aims to simplify the existing system for businesses and individuals.
The link above includes a comprehensive overview of the plan, but some of the key provisions include:
Business Tax Reform
- Capital investment deduction. Under current law, businesses are allowed to deduct the loss in value -- or "depreciation" -- of the capital investments they make (such as new software or equipment upgrades) according to determinations made by the IRS. The Lee-Rubio plan would allow them to deduct the full immediate cost of these expenses in order to incentivize firms to invest in better salaries and benefits, new technology, and other means of improving output.
- Ending double taxation of corporate income. At present, corporations are taxed twice on their investments: once when they produce returns, and again when the value is passed to shareholders in the form of dividends or capital gains from stocks. The Senators' plan would instead institute a 25 percent tax on c corporations; dividends and capital gains would not be subject to additional taxation, and investors would recieve annual notices of how much corporate tax had been paid on their behalf.
- Ending tax extenders and deductibility of new debt. The Lee-Rubio plan eliminates the extenders that Congress considers nearly every year in favor of a simpler system. It also ends the deductibility of new debt, which the Senators claim will lessen the tax bias towards borrowing.
- Exempting international dividends. By establishing a repatriation dividend exemption, the Lee-Rubio plan reduces the incentive for multinational firms to hold and shift profits overseas.
Reform for Individuals and Families
- Consolidating the number of tax brackets. The Lee-Rubio proposal would pare down the number of personal income tax brackets from 7 to 2. If a single or joint filer makes less than $75,000 or $150,000, respectively, they will be subject to a 15 percent rate on all taxable income. Above those thresholds, the rate would be 35 percent.
- Creating a new child tax credit. The new partially-refundable credit would be limited to a maximum of $2,500 for each eligible child, with no phase-out (as opposed to the current child tax credit, which is also limited to $1,000).
- Eliminating the standard deduction and Alternative Minimum Tax (AMT). The standard deduction would be replaced with a $2,000 and $4,000 credit for single and joint filers, respectively. Senators Lee and Rubio propose doing away with the AMT as well as all itemized deductions except for a modified version of the home mortgage interest deduction and those for charitable giving.
By the Senators' own admissions, the plan is "not intended to be a cure-all and [does] not represent the last word on tax reform. In fact, we acknowledge that several of these proposals should occur in conjunction with other policy improvements, such as reforms to our health care, education, retirement, entitlement, and welfare systems." The Lee-Rubio proposal does not represent a comprehensive (in their words, "sweeping and overly prescriptive") solution, but offers some starting point for Congress to consider as the tax reform debate continues.