|March 7, 2014|
Previously published on February 28, 2014
On February 26, 2014, House Ways and Means Committee Chairman David Camp (R-Mich.) released his plan for U.S. federal tax reform by introducing draft legislation called the "Tax Reform Act of 2014." The proposal is intended to simplify the Internal Revenue Code and strengthen the economy by lowering tax rates in an effort to create jobs in the United States. The proposal recommends significant tax rate cuts for individuals and businesses and attempts to pay for such rate reductions by curtailing or eliminating individual and business tax breaks. The following is a brief summary of some of the changes proposed under the draft legislation.
Camp's plan proposes to cut the top tax rate for both individuals and corporations to 25 percent and eliminate the alternative minimum tax (AMT) for both individuals and corporations. Further, with respect to corporate tax rates, Camp's plan proposes to eliminate the bottom 15-percent rate on income under $50,000 and, with respect to individual tax rates, create a new 10-percent surtax on individuals earning more than $400,000 and joint filers earning more than $450,000 under a new definition of "modified adjusted gross income."
- Camp's plan proposes to eliminate the 20-percent preferential tax rate on long-term capital gains and qualified dividends, causing those items to be taxed as ordinary income. For noncorporate taxpayers, the proposal provides for an above-the-line deduction equal to 40 percent of adjusted net capital gain.
- Camp's plan proposes to increase the standard deduction from $6,100 to $11,000 for individuals and from $12,200 to $22,000 for joint filers. It also proposes to: (i) increase the child credit to $1,500 per child and $500 per dependent; and (ii) eliminate several itemized deductions and exclusions, including the deductions for medical expenses and moving expenses.
- With respect to corporate reforms, the Camp plan proposes to: (i) phase in the flat tax rate of 25 percent over five years commencing in 2014; (ii) make permanent a modified version of the expired research credit equal to 15 percent of the basic research payments over specific thresholds; (iii) repeal the domestic production credit starting in 2016; (iv) repeal the 2.3-percent medical device excise tax; and (v) eliminate various tax incentives aimed at the alternative energy sector.
- The plan also proposes to eliminate the accelerated cost recovery system and replace it with a longer depreciation system.
- The plan additionally contains the proposed repeal of rules allowing deferral of gain on like-kind exchanges for transfers after 2014.
- With respect to S corporations, the plan includes a provision that will cause S corporation shareholders to calculate their earnings for purposes of self-employment taxes based on whether the shareholder materially participates in the trade or business of the S corporation. For shareholders that materially participate, the proposal would treat 70 percent of the shareholder's combined compensation and distributive share of the S corporation's income as net earnings subject to the Federal Insurance Contributions Act (FICA) or Self-Employment Contributions Act (SECA), as applicable.
- With respect to partnership reforms, the Camp plan proposes to: (i) require basis adjustments to partnership property upon the transfer of partnership interests or distributions of partnership property; (ii) tax a portion of carried interests from investment partnerships as ordinary income; and (iii) repeal the TEFRA audit rules and replace them with an audit system that would shift liability onto the partnerships if they have more than 100 partners.
- The Camp plan proposes to tax certain financial institutions with assets in excess of $500 billion. The tax would be a quarterly tax of 0.035 percent of the assets.
- The Camp plan also has international tax proposals, including: (i) applying a 95-percent dividend exemption upon the repatriation of foreign earnings; and (ii) adding a new category of Subpart F income called "foreign base company intangible income" and revising the Subpart F income rules generally so that only low-taxed foreign income would be taxed under Subpart F, such as foreign base company sales income, foreign personal holding company income and foreign base company intangible income.
According to the Joint Committee on Taxation (the "JCT"), the Camp plan would simplify the Code and make it fairer by providing a significantly more generous standard deduction so that nearly 95 percent of taxpayers would no longer have to itemize their deductions; reducing the size of the Code by 25 percent; and tackling fraud, abuse and mismanagement at the Internal Revenue Service. Further, the JCT reports that the Camp plan would benefit U.S. businesses and overall economic growth by lowering tax rates for American businesses to make them more competitive, closing loopholes some companies use to ship jobs and profits overseas and eliminating the double tax that applies to overseas earnings of U.S. companies if those companies want to reinvest those earnings in the United States—thus allowing them to bring back to the United States nearly $2 trillion in "trapped cash" to invest and hire in America. As a result, the JCT reports that the Camp plan would strengthen the U.S. economy, resulting in $3.4 trillion in economic growth, 1.8 million new jobs and $1,300 per year in savings for middle-class American families.