Tax Reform Act of 2014 – Trimming Deductions While Lowering Tax Rates

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For years, plans to simplify America’s convoluted tax codes have been proposed by federal legislators and economic pundits alike. At present, an estimated 1.2 million of the most brilliant tax attorneys and tax specialists grapple to recognize and take advantage of all the complicated intricacies contained within the 73,954 pages of IRS tax rules and regulations. Individual taxpayers and corporations who can afford to hire the best and brightest will exploit every possible deduction and pay the lowest possible taxes, while those who can’will again pay top dollar to Uncle Sam.

We have all heard of the “flat tax” and “fair tax” proposals. From an economic perspective, the flat tax and the national sales tax (or “fair tax”) are virtually identical, as “[b]oth would begin with junking the current system. Both would restore fairness by taxing at one low rate. Both would eliminate all forms of double taxation.”  As recently as March 7, Sen. Ted Cruz (R-TX) resurrected the mantra of nearly every 2012 Republican presidential candidate: Abolish the IRS, and do your taxes on a postcard!

On February 26, 2014, House Ways and Means Committee Chairman Dave Camp (R-MI) released his 979-page draft legislation titled the Tax Reform Act of 2014. In a less radical form than either the fair or flat tax, the intent of this act is to move towards a greatly simplified, flatter tax meant to eliminate loopholes, and level the playing field for families and job creators. While many deductions are eliminated, many new incentives are put in place in order to spur economic growth and job creation. Analysis by the non-partisan Joint Committee on Taxation shows that the Tax Reform Act will:

  • Create 1.8 million new private sector jobs.
  • Allow 95 percent of tax filers to receive the lowest possible tax rate by claiming just the new standard deduction.
  • Increase GDP by up to 3.4 trillion.
  • Save an average middle class family of four $1,300 per year from the combination of the reduced tax rates and higher wages, based on a stronger economy.
  • Crack down on waste, fraud and IRS abuses.
  • Increase the existing allowance of a $25,000 deduction of the cost of qualifying property up to $250,000.
  • Provide no increase to the budget deficit.

In essence, the plan compresses the existing seven tax brackets down to just three: namely, 10, 25 and 35 percent. The 10 percent rate would apply to taxpayers with taxable income below $35,600, or           $71,200 jointly. Above that level, the rate will be 25 percent, continuing up until the final plateau of       $400,000, or $450,000 jointly. At this point, the rate will tick-up the additional 10 percent, taking it to the full 35 percent.

The standard deduction will increase to $11,000 for an individual and $22,000 for joint filers. There is also an additional deduction of $5,500 for single taxpayers with at least one qualifying child, but this begins to phase out at $30,000 in adjusted gross incomes (AGI). Addressing the issue of corporate income, the rate would decline from 35 to 25 percent in five years, beginning in 2015 and ending in 2019.

Over the course of Camp’s three years as Chairman of the House Ways and Means Committee, his bi-partisan panel, working to develop an equitable plan for tax reform, went to great lengths to gather input from individuals, families and job creators of all sizes and industries.  As part of the process, more than 30 separate Congressional hearings took place. Under the direction of Ranking Member Sander Levin (D-MI), 11 separate tax reform working groups were created, developing 3 discussion drafts examining specific items in the existing tax code. To ensure that everyone “got a seat at the table”, over 14,000 public comments were also reviewed from the website.

Certainly, no tax reform can proceed without its detractors. Democrats want new revenue (taxes) to maintain revenue neutrality. Also, with the elimination of the federal tax deduction for state and local taxes, residents of high tax states who itemize deductions, such as New York and California, will certainly feel the pinch.

It is probably unlikely that this reform will pass this year due to the items that still need to be addressed and resolved; however, there is a considerable overlap between this proposal and the FY 2015 budget submitted by the White House. Both propose to limit the value of itemized deduction on the rich. The President would cap it at 28 percent, Camp at 25 percent. Obama’s budget calls for the corporate tax rate to be reduced from 35 to 28 percent, Camp’s proposal drops this to 25 percent as well.

Based on these minor disparities, when the time comes, the Executive Branch will more than likely be on board.