By Ryan Rainey
June 24, 2016 at 12:05 am ET
A House Republican tax reform plan set to be released Friday with the backing of Speaker Paul Ryan would establish three individual income tax brackets and lower the corporate tax rate to 20 percent from its current level of 35 percent.
The tax reform plan is the latest installment of the House GOP’s “Better Way” agenda, which the Wisconsin Republican is promoting as a blueprint for how a Republican Congress would govern with the help of a Republican president.
The ambitious plan would whittle the number of individual tax brackets from seven to three. The three rates would tax income at 12 percent, 25 percent and 33 percent.
Republican leaders avoided advocating for a complete flat tax that’s popular among conservatives. A senior GOP leadership aide said the tax reform task force avoided pushing for that option because one goal of the plan was to avoid raising taxes for the most taxpayers possible. A flat tax would raise taxes for more people than not.
Rep. Kevin Brady of Texas, the chairman of both the Ways and Means Committee and the House GOP task force on tax reform, said in a statement that the plan will “make our tax code fairer, flatter, and simpler. He added that the plan “will redesign the IRS into an agency that delivers excellent customer service.”
House GOP Chart on Changes to Individual Income Tax Brackets
The GOP plan would also abolish the alternative minimum tax and the estate tax — two taxes on individual income that Republicans regularly deride — while keeping existing tax incentives such as the earned income tax credit and tax breaks for mortgages, charitable donations and savings for retirement. The plan doesn’t advocate expanding the EITC to U.S. territories such as Puerto Rico, which has become a key Democratic policy priority in the debate over San Juan’s debt crisis.
Republican leadership aides said a guiding principle of the blueprint is to go beyond the type of base-broadening, rate-lowering measures that have typified past tax reform discussions and instead do something more “bold.” That means this year’s proposal focuses on shifting from the use of income as the primary tax base to consumption.
“Consumption-based tax systems are widely regarded to be more pro-growth than income-based tax systems like the current tax code,” the GOP’s tax policy paper says. “The reason involves the treatment of capital income – that is, the return to saving. An income tax includes saving in the tax base and thus penalizes saving, whereas a consumption-based system – as the name suggests – taxes only what is consumed, not what is saved.”
The blueprint also blesses a number of ideas that have been floating in the GOP tax policy space for some time. That includes allowing taxpayers to submit a “postcard” tax return while overhauling the consumer service functions of the Internal Revenue Service.
The plan stops short of embracing an “abolish the IRS” position that Sen. Ted Cruz (R-Texas) pushed for on the 2016 presidential campaign trail. But it does refer to IRS abolition as it’s envisioned in the “Fair Tax” plan as one of several “serious ideas for pro-growth tax reform.”
The plan also envisions a territorial tax system that would assess a transition tax on foreign earnings of 8.75 percent for liquid assets and 3.5 percent for illiquid assets. Republicans also want to shift to a “destination”-based system that would exempt export-oriented businesses from taxes.
“Under a destination-basis approach, tax jurisdiction follows the location of consumption rather than the location of production,” according to the GOP’s policy paper. This move, combined with the switch to a territorial system, would “allow other important aspects of the international tax rules to be simplified and streamlined significantly,” the paper stated.
On the business tax end, the plan notably allows for full expensing of businesses’ capital expenditures. This system, which Sen. Rand Paul (R-Ky.) and Rep. Devin Nunes (R-Calif.) have championed, would allow businesses to claim up-front write-offs on business-related capital expenditures.
“Allowing investments to be immediately written off provides a greater incentive to invest than is provided through interest deductions under current law; allowing both together would be distortive as it would result in a tax subsidy for debt-financed investment,” the policy paper stated.
The House GOP leadership aide said the leaders believe a score of the proposal, using a dynamic model, will show that the plan could create hundreds of billions of dollars worth of new revenue.
Ryan will formally release the plan at a Capitol Hill press conference Friday morning. The plan doesn’t include a discussion draft with legislative language, and it likely will not be put on the House floor for a vote this year. Its main function, for now, is to tee up an almost certain tax reform conversation for the next Congress.
Ryan Rainey previously worked at Morning Consult as a reporter covering finance.