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GOP plans big overhaul of tax system

By STEPHEN OHLEMACHER Associated Press

WASHINGTON -- Congressional Republicans are planning a massive overhaul of the nation's tax system next year, a heavy political lift that could ultimately affect families at every income level and businesses of every size.

Their goal is to simplify a complicated tax code that rewards wealthy people with smart accountants, and corporations that can easily shift profits -- and jobs -- overseas. It won't be easy. The last time it was done was 30 years ago.

Senate Majority Leader Mitch McConnell, R-Ky., and Speaker Paul Ryan, R-Wis., have vowed to pass a tax package 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, creating winners and losers. Lawmakers would get some leeway if non-partisan congressional analysts project that a tax cut would increase economic growth, raising revenue without increasing taxes.

Nevertheless, passing a massive tax package will require some tough votes, politically.

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, who faulted Democrats for acting unilaterally on health care, is laying the groundwork to pass a purely 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 Obama's health law. House Republicans are more eager to get started, but haven't set a timeline.

Some things to know about Republican efforts to overhaul the tax code:

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THE HOUSE PLAN

House Republicans have released the outline of a tax 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 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 non-partisan Tax Policy Center says the plan would reduce revenues by $3 trillion over the first decade, with most of the savings going to the highest-income households.

That's not revenue neutral.

Small business owners would get a special top tax rate of 25 percent.

Investment income would be taxed like wages, but investors would only have to pay taxes on half of this income.

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SENATE PLAN

Senate Republicans have yet to coalesce around a comprehensive plan, or even an outline.

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TRUMP'S PLAN

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 revenues by a whopping $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 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.

Trump has embraced two ideas championed by Obama but repeatedly rejected by Republicans over the past eight years. Trump's plan would cap itemized deductions for married couples making more than $200,000 a year. It would also tax carried interest, which are fees charged by investment fund managers, as regular income instead of capital gains.

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CORPORATE TAXES

The top corporate income tax rate in the U.S. is 35 percent, the highest in the industrialized world. However, the tax is riddled with so many exemptions, deductions and credits that most corporations pay much less.

Both Trump and House Republicans want to lower the rate, and pay for it by scaling back tax breaks.

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

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BORDER ADJUSTMENT TAX

This is one of the most controversial parts of the House Republicans' tax plan. It is also key to making it work.

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, more dramatically, to shift operations and jobs abroad to avoid U.S. taxes.

House Republicans want to scrap America's 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 the 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 abroad, the profits from that sale would not be taxed by the U.S.

There's more: Foreign companies that import goods to the U.S. would have to pay the tax, increasing the cost of imports.

Exporters love the idea. But importers, including big retailers and consumer electronics firms, say it could lead to steep price increases on consumer goods. The lobbying has already begun.

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Follow Stephen Ohlemacher on Twitter at: http://twitter.com/stephenatap

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This story has been corrected by referring to adding to the budget deficit, not the budget.

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