The much awaited draft version of the Tax Reform Act of 2014 from the House Ways and Means Committee Chairman Dave Camp (R-MI) is finally here.
Here’s the full draft of the tax reform plan. For a plan that’s supposed to make the tax code maze of 70,000 pages simpler, the draft itself is quite a complex pretzel.
Here’s the low-down on Rep. Camp’s plan of action. Without increasing the budget deficit, the draft plan will:-
- Create 1.8 million new private sector jobs;
- Get rid of all but two individual tax brackets of 10 and 25 percent, and reduce the corporate tax rate to 25 percent;
- Get rid of the need to prepare and file itemized tax deductions for 95 percent of filers by enhancing the standard deduction to $11,000 for individuals and $22,000 for married couples;
- Get rid of capital gains tax by exempting the first 40 percent of investment income and taxing the rest as ordinary income;
- Eliminate the Alternative Minimum Tax (AMT);
- Treat carried interest as ordinary income instead of investment returns;
- Seniors over 65 will have a separate and simpler tax return to be known as Form 1040SR;
Now that’s the official version from the Camp camp, so to speak. Obviously, it’s not as cut and dry as this, and there’s another side to the reform plan.
For instance, the individuals actually face three tax brackets – 10 percent for those with incomes below $35,600; 25 percent for those whose incomes do not exceed $400,000; and 35 percent for those above.
The hike in the standard deduction is accompanies by the elimination of the personal exemption.
State and local taxes would no longer be deductible expenses, and there would be a cap on mortgage deductions for larger loans.
The EITC takes a shellacking, and is left as a limited payroll tax deduction. There are tons of small tax credits and deductions that got chucked out of the plan.
You can pore over the plan and nitpick over the pros and cons, but the broad picture shows that Dave Camp’s plan has a sound basis to become tax law, subject of course to a gazillion amendments that will make the final bill an entirely different creature as compared to this one.
For example, the EITC changes will be unacceptable to the White House.
The elimination of deductions for state and local taxes will likewise be severely opposed by states like California and New York since wealthy constituents will force their elected representatives to oppose the whole bill unless this part is stripped out of it.
Add up everything everyone doesn’t like about the bill, and it’s fair to say the bill as it stands has next to no chance of getting a vote, leave alone becoming law.
The key factor in favor of the plan is that it doesn’t redistribute wealth by shifting tax burdens from one class to another.
Another key positive is that it doesn’t seek to raise the overall amount of tax revenues or lower them, both of which would be poison to one or the other side as either a tax cut or hike.
The rest of the plan is just about simplifying the tax code within these parameters. Many proposed changes may get chucked out along the way, but the tax code will be somewhat simplified at the end of the day.
Of course, that doesn’t mean it’s going to happen. There’s a small window for debate and a vote before election fever grips Washington again. It’s more likely that there will be a half-hearted attempt, and it will then be put off until after the mid-term elections.
Here’s the full draft legislation of the Tax Reform Act of 2014, and you may also look at it in sections here.