Citizens for Tax Justice Releases Tax Reform Plan

Citizens for Tax Justice has released a new tax reform plan which eliminates some tax breaks and uses some of the revenue to cut the top rate and simplify some tax provisions. In total, they estimate the package would raise $2.4 trillion in revenue over the next ten years, or $2 trillion in permanent revenue when temporary effects of a few policies (like accelerated depreciation) are excluded. Much of this revenue comes from eliminating business tax expenditures.

On the individual side, the plan would combine the 33, 35, and 39.6 percent brackets into one 36 percent bracket, and heavily increase taxes on investment by taxing capital gains and dividends as ordinary income and repealing step-up basis for capital gains at death. It would also adopt President Obama's proposal to limit the value of certain deductions and exclusions to 28 percent, reducing their value for people in the 36 percent bracket. Some of the revenue raised is given back by increasing the standard deduction by one-third and repealing some individual provisions that add complexity to the tax code: the personal exemption phaseout, the Pease limitation on itemized deductions, and the Alternative Minimum Tax. In total, their individual reforms raise about $475 billion over ten years.

The business reforms raise the bulk of the revenue, and most of the policies come from the Wyden-Gregg reform bill. The largest policies are to repeal the deferral of taxation on foreign subsidiaries' income so corporations are taxed on their worldwide income. The plan would also repeal accelerated depreciation, reduce the corporate interest deduction by the amount of inflation, and repeal the domestic production activities deduction. In addition, the plan would include smaller policies from Wyden-Gregg like repealing certain oil and gas tax preferences and repealing the lower-of-cost-or-market accounting method. The business reforms would raise $1.5 trillion when temporary revenue effects are excluded. The report also includes two illustrative estimates for reducing the corporate rate to 32 and 30 percent but does not include them in their revenue estimates for the whole plan. Check out our corporate tax calculator to see more examples of combinations of rate reductions and tax expenditure eliminations.

^{Source: ITEP, JCT}

CTJ's plan is a helpful contribution to the tax reform debate. It is very helpful that they chose to separate out the temporary effects from the permanent effects of the policies. Hopefully, lawmakers will be similarly informed when they consider a tax reform package, which will help them avoid gimmicks that raise short-term revenue but hurt our long-term deficit situation.