New Tax Plan Would Lower US Corporate Rate to 25%

Last week, US Representative Dave Camp (R-MI), who oversees the House Ways and Means Committee, released the most detailed plan for overhauling the federal tax code since its last major restructuring in 1986.  Camp hailed the proposal as the product of bipartisanship that spanned three years of congressional hearings, discussion drafts and the 11 tax reform working groups.

Camp’s plan broadens the taxable base and flattens out of the tax rate structure in an effort to down the marginal corporate rate. In doing so, revenue losses are offset by repealing several business tax provisions.

Treatment of foreign corporate earnings would no longer be deferrable, instead switching to a territorial system moving forward—with a one-time retroactive rate on current earnings locked overseas.

Changes would be made to the treatment of investment income, and the corporate alternative minimum tax (ATM) would be repealed. A new excise tax is introduced for large banks and insurance companies deemed systemically-important, levied on a quarterly basis at .035 percent on consolidated assets above $500 billion.

Corporate Rate

Camp’s plan would drop the top marginal corporate rate from 35 percent to 25 percent over a five-year period. Starting in 2015 until 2019, the rate would fall each year by 2 percent.

Foreign Profits

Under the current system, overseas corporate earnings are either subject to the 35 percent rate upon repatriation or deferred, leaving income locked outside the US Camp’s plan would move toward a territorial system, where all earnings would be deemed repatriated under a 95 percent tax exemption on all foreign-earned income.

Already accumulated foreign income would receive a one-time repatriation rate of 8.75 percent, while invested foreign assets would be taxed at 3.5 percent. Fulfilment of this payment would be granted the option of being made over an eight-year period, and the proceeds would be applied to the Highway Trust Fund.

Cost Recovery

Current tax treatment permits businesses to write-off the depreciation of assets and investments at an accelerated rate. Accelerated depreciation, as it is known, is heavily utilised for capital investments, allowing larger immediate write-offs for industrial company purchases. This provision would be replaced with the alternative deprecation system, essentially slowing the deduction rates to more closely reflect the given life-span of an asset, while adjusted for inflation. Fully expensing within a single year for research and development and advertising costs would be replaced with amortisation, enabling only a 50 percent cost deduction over five years.

Under the plan, the ‘last-in, first-out’ inventory accounting method would be repealed. All businesses would be required to use ‘first-in, first-out’ method when accounting for inventory costs. Further, existing inventory would be retroactively taxed, payable on a phased basis.    

Additional deductions and credits directed at manufacturing expenses, energy provisions and executive compensation would also lose special treatment.

Investment Income

Capital gains and dividends would be taxed as ordinary income, but with a 40 percent exemption. In addition to the 3.8 investment surtax dedicated to the Affordable Care Act and the 60 percent ordinary income tax inclusion, the rate would increase from 23.8 to 24.8 percent.

“No hope”

Almost immediately upon release, congressional leadership from both political sides dismissed the plan. Senate Minority Leader Mitch McConnell (R-KY) said Camp’s plan had “no hope” of passing anytime soon. “If we had a new Republican Senate next year, coupled with a Republican House, I think we could have at least a congressional agreement that this is about getting rates down and making America more competitive, you know, not about giving the government even more revenue,” he added.

When asked whether he would endorse the plan, House Speaker John Boehner (R-OH) responded that “there’s a conversation that needs to begin. This is the beginning of the conversation.”  Senate Majority Leader Harry Reid praised Camp for his effort, though adding that “It will be extremely difficult—with the obstruction that we get here from the Republicans on virtually everything—to do something that should have been done years ago.”

The business community has shown a mixed reaction to the proposal. Some industry groups responded favourably to the base-broadening revenue trade-off, while many—particularly from the energy, financial, advertisement and manufacturing sectors, who stand to lose tax preferences—expressed dismay over the proposed regime.  

Organisations, such as the Chamber of Commerce and the Business Roundtable have praised Camp’s effort to materialise what, until then, was left to abstract political posturing, but still stopped short of offering an endorsement.

In an op-ed Camp released just before he unveiled his tax plan, he touted his proposal’s scoring by the congressional Joint Committee on Taxation. “According to those estimates, after this streamlining of the tax code, the size of the economy will increase by $3.4 trillion over the next decade, or roughly 20 percent compared with today,” Camp wrote in the Wall Street Journal.  

While the chances of this plan moving forward remain slim on account of congressional support, Camp has expressed confidence that, should it not succeed, his plan will certainly serve as a template for the final legislative outcome.


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