In January, the President announced the establishment of the bipartisan panel to advise on options to reform the tax code to make it simpler, fairer, and more pro-growth to benefit all Americans. 

The panel issued two alternative recommendations.  The “Growth and Investment Tax Plan” recommends a 30% tax on business cash flow from domestic operations that provides for full expensing of capital purchases.  Interest paid by businesses would no longer be deductible.  The territorial system could be adjusted to be a border-adjustable system that would tax imports at the business level and eliminate taxes on U.S. exports.  The R&D tax credit and other business tax credits would be eliminated.  The individual and corporate Alternative Minimum Tax (AMT) would be repealed.  Deductions for employer-provided health insurance in excess of $11,500 for families and $5,000 for singles would be included in individual employees’ income.  Persons without employer-provided health insurance could deduct premiums up to the $11,500/$5,000 limits. 

Three individuals tax brackets would range from 15% to 30% (75% of households would be in the 15% bracket).  The state and local tax deduction would be eliminated.  The mortgage interest deduction would be converted to a 15% credit with a cap on the eligible mortgage amount, depending upon average regional housing prices (limits ranging from $227,000 to $412,000).  The charitable deduction would be converted to a 15% credit on contributions in excess of one percent of income.  All individuals could put up to $10,000 of annual taxable income into each of three Roth IRA-type savings accounts, distributions from which would never be taxed.  Dividends, capital gains and interest income would be taxed at a 15% rate.  The personal exemption standard deduction and various individual credits (e.g., child credit) would be replaced by a family credit ($1,650 for singles, $3,300 for married couples plus $1,500 for each child); and the earned income tax credit for low-income workers would be replaced by a work credit (up to $3,750-$5,800 depending upon family size). 

The second alternative – the “Simplified Income Tax Plan” (SITP) taxes small businesses’ (under $1 million in sales) cash flow at individual rates and would allow expensing.  Larger businesses would pay 31.5% on income from domestic operations; but could not expense capital purchases (current depreciation rules would be simplified), and current accrual accounting rules would apply.  Interest would continue to be deductible.

Four individual tax brackets would range from 15% to 33% under SITP.  Dividends would not be taxed, while 75% of capital gains would be excluded.  Interest would continue to be taxed at the individual’s regular tax rate.  All other provisions of the “Growth and Investment Tax Plan” applying to individuals are included in the SITP.

AMT supports a tax system that provides for the expensing of capital purchases; that exempts savings; and that has the effect of border-adjustability in order to remove unfair distortions caused by foreign VATs and other foreign tax and trade laws.

Tax Reform Panel Final Report Executive Summary