GOP plans to cut tax rates and brackets

Posted: December 27, 2016 at 2:40 a.m.
Updated: December 27, 2016 at 2:40 a.m.

WASHINGTON -- Congressional Republicans are planning to simplify a complicated tax code that rewards wealthy people with smart accountants, as well as corporations that can easily shift profits and jobs overseas.

Overhauling the nation's tax system is a heavy political lift that could ultimately affect families at every income level and businesses of every size. The last time it was done was 30 years ago.

Senate Majority Leader Mitch McConnell, R-Ky., and House Speaker Paul Ryan, R-Wis., have vowed to pass a tax package in 2017 that would not add to the budget deficit. The Washington term is "revenue neutral."

It means that for every tax cut there has to be a tax increase or a spending cut. Lawmakers would get some leeway if nonpartisan congressional analysts project that a tax cut would increase economic growth, raising revenue without increasing taxes.

Some key Republican senators want to share the political risk with Democrats. They argue that a tax overhaul must be bipartisan to be fully embraced by the public. They cite President Barack Obama's health law -- which passed in 2010 without any Republican votes -- as a major policy initiative that remains divisive.

Congressional Democrats say they are eager to have a say in overhauling the tax code. But McConnell is laying the groundwork to pass a partisan bill.

Both McConnell and Ryan said they plan to use a legislative maneuver that would prevent Senate Democrats from using the filibuster to block a tax bill.

McConnell says he wants the Senate to tackle a tax plan in the spring, after Congress repeals the Patient Protection and Affordable Care Act, popularly called Obamacare. House Republicans are more eager to get started, but haven't set a timeline.

Senate Republicans have yet to coalesce around a tax plan, but their House counterparts have released the outline of a plan that would lower the top individual income tax rate from 39.6 percent to 33 percent, and reduce the number of tax brackets from seven to three. The gist of the plan is to lower tax rates for just about everyone and to make up the lost revenue by scaling back exemptions, deductions and credits.

The plan, however, retains some of the most popular tax breaks, including those for paying a mortgage, going to college, making charitable contributions and having children.

The standard deduction would be increased, giving taxpayers less incentive to itemize their deductions.

The Tax Policy Center -- which bills itself as nonpartisan but which some Republicans have criticized as favoring Democrats -- says the plan would reduce revenue by $3 trillion over the first decade, with most of the savings going to the highest-income households.

President-elect Donald Trump's plan has fewer details. He promises a tax cut for every income level, with more low-income families paying no income tax at all.

The Tax Policy Center says Trump's plan would reduce revenue by $9.5 trillion over the first decade, with most of the tax benefits going to the wealthiest taxpayers. Trump has disputed the analysis.

Like the House plan, Trump's plan would reduce the top income tax rate for individuals to 33 percent, and he would reduce the number of tax brackets to three. He would also increase the standard deduction.

Congressional Democrats say portraying the changes as a boon for the rich will be the focus of their opposition.

"There's going to be opposition if these tax cuts are directed to the people at the top again," said Rep. Richard Neal, D-Mass., who represents his party's first line of defense as the next ranking member of the House's tax-writing Ways and Means Committee. "We're going to be pretty united."

Neal and others say they'll zero in on upper-income tax breaks pitched by Trump and House leaders in an attempt to make it politically difficult for Republicans to support large parts of the emerging plans.

Trump has sought to portray his plan as a pro-growth simplification of the tax code that would benefit the middle class. In a "Contract with the American Voter" published before the election, his campaign said of his proposal: "The largest tax reductions are for the middle class."

Democrats plan to challenge this claim. "His populist image and the reality of his policies are on a collision course," said Rep. Keith Ellison of Minnesota, a candidate for Democratic National Committee chairman. "And they're going to crash."

Democratic leaders haven't put forth a tax plan of their own to counter the House Republican proposal. Neal said Democrats intend to introduce alternatives soon but didn't provide details, saying only that any tax breaks should be targeted at the middle class.

Both Trump and House Republicans want to lower the corporate income tax rate and pay for it by scaling back tax breaks. The top rate is 35 percent, but most corporations pay much less thanks to exemptions, deductions and credits.

Trump wants to lower the corporate tax rate to 15 percent. Ryan says 20 percent is more realistic to avoid increasing the budget deficit.

House Republicans also want to scrap the United States' worldwide tax system and replace it with a tax that is based on where a firm's products are consumed, rather than where they are produced.

Under current law, the United States taxes the profits of U.S.-based companies, even if the money is made overseas. However, taxes on foreign income are deferred until a company either reinvests the profits in the U.S. or distributes them to shareholders.

Critics say the system encourages U.S.-based corporations to invest profits overseas or to shift operations and jobs abroad to avoid U.S. taxes.

Under the new system, American companies that produce and sell their products in the U.S. would pay the new 20 percent corporate tax rate on profits from these sales. However, if a company exports a product, the profits from that sale in another country would not be taxed by the U.S.

Foreign companies that import goods to the U.S. would have to pay the tax.

Exporters have shown support for the idea. But importers, including big retailers and consumer-electronics firms, say it could lead to steep price increases on consumer goods.

Information for this article was contributed by Stephen Ohlemacher of The Associated Press; and by Sahil Kapur of Bloomberg News.

A Section on 12/27/2016