Tax Blog/Blawg

A little more than a year after introducing The Bipartisan Tax Fairness and Simplification Act of 2010, Senator Ron Wyden (D-Ore.) has returned with a new partner, Dan Coats (R-Ind.), to push for much-needed simplification of the Internal Revenue Code.  As with the earlier proposal, the Wyden-Coats proposal focuses on broadening the tax base and generally lowering statutory tax rates.

For some of the mixed reactions to the proposal, see the Tax Foundation and The Hill.

For businesses, the proposal would:

• Lower the corporate tax rate to a flat 24 percent;

• Eliminate the “deferral” regime of subpart F and return to the "per-country" foreign tax credit system;

• Permit a one-time, low-tax repatriation of foreign earnings;

• Permit businesses with gross receipts of less than $1 million to expense all equipment and inventory costs in a single year; and

• Index corporate interest deductions for inflation.

The elimination of the “deferral” regime of subpart F, which has been raised by other officials, seems unlikely to be passed by Congress.  As scored by the Joint Committee, this change in corporate taxation would raise taxes on U.S. multinationals by some $600 billion over ten years.  Considering that many of companies that would likely be affected by this change are headquartered in politically important “swing” states, I have a hard time seeing this proposal finding safe passage through Congress.  (The mere fact that Senator Coats, a Republican from Indiana, is a co-sponsor of this proposal was a surprise.)

The last proposal, which we have discussed previously at some length is intended to discourage the use of debt to finance business activities.  Since the financial crisis of 2008-2009, deleveraging has been all the rage for individuals and businesses.  Nevertheless, Wyden-Gregg/Coats’ proposal still seems an unnecessarily complex way of promoting that goal.

For individuals, the proposal would:

• Introduce three tax brackets: 15, 25, and 35 percent;

• Nearly triple the standard deduction;

• Consolidate retirement plans and permit up to $14,000 (for joint filers) in retirement contributions per year;

• Introduce a 35-percent exclusion for dividends and long-term capital gains; and

• Cut the holding period to six months for the first $500,000 of a taxpayer’s capital gains.

The proposal would also eliminate the alternative minimum tax (AMT) for both individual and corporate taxpayers.

Although the proposal continues Wyden-Gregg’s admirably bold attempt to further the discussion about fundamental tax reform, its prospects seem unlikely.  Without the $600 billion to be raised by repealing the deferral regime for U.S. multinationals, it will likely be exceedingly difficult for the bill to pay for itself.  As awareness of long-run fiscal challenges continues to grow, a bill that cannot at least pay for itself (if not reduce deficits) is not likely to go far.