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Bill Would Replace US Corporate Tax With VAT-Like Tax

by Mike Godfrey, Tax-News.com, Washington

18 July 2016

Jim Renacci (R – Ohio), a member of the House of Representatives Ways and Means Committee and Budget Committee, has issued a US tax reform plan – Simplifying America's Tax System (SATS) – that would eliminate corporate income tax and replace it with a new seven percent credit-invoice based consumption tax.

The new so-called business activity, which has been likened to a value-added tax (VAT), would be a complete break from the official policy proposed by the House Republican Party that would cut the federal headline corporate tax rate from the current 35 percent to 20 percent. The VAT would apply to all private businesses and the federal government, but would exempt nonprofit organizations and state and local governments.

"A simple corporate rate reduction around the OECD average won't stop companies from relocating overseas or being acquired by foreign companies located in jurisdictions with more pro-growth tax regimes," Renacci said. "SATS is a bold pro-growth solution to business tax reform that would make our tax system the most competitive in the world."

"A zero percent corporate rate will bring a flood of investment to the United States," the proposal said. "SATS will make the United States the most competitive tax system in the world," Renacci added. "And, since all businesses will have the option to be treated as a corporation for tax purposes, SATS ensures a level playing field by not picking winners and losers."

The plan would eliminate any need to move to a territorial international tax system, but would introduce a deemed repatriation tax rate on currently deferred corporate foreign profits at 8.75 percent for cash and cash-equivalent profits, and 3.5 percent on other profits.

On individual income tax, SATS would have a three-rate (10-25-35 percent) structure, thereby "reducing income tax rates for all taxpayers." The standard deduction would be increased so that a family of four would have no tax liability on income up to USD50,000; the Earned Income Tax Credit would be expanded; and the Child Tax Credit would be retained.

The deductions for mortgage interest (with a cap at USD500,000 of acquisition debt) and charitable contributions, and the exclusions for retirement savings and employer-sponsored health insurance, would be preserved. The Alternative Minimum Tax would be eliminated, and capital gains and dividends would be taxed at normal rates.

It is intended that, "even accounting for the impact of the consumption tax, low-to-middle income households will see an after-tax increase in income similar to higher income households."

The Tax Foundation (TF) has indicated that, on a traditional static basis, Renacci's plan would reduce tax revenues by USD845bn over the next ten years. However, on a dynamic basis (allowing for the increased economic growth the plan should generate), it would end up raising additional revenue of USD695bn, with most of the dynamic revenue coming from the new "VAT." According to TF, the plan would lead to 5.6 percent higher gross domestic product over the decade, with 1.9m additional jobs.

TAGS: tax | investment | business | value added tax (VAT) | interest | accounting | insurance | retirement | tax rates | United States | dividends | tax reform | individual income tax | Tax

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