Rep. Jim Renacci (R-OH) released a tax reform white paper today (July 14, 2016) calling for eliminating the corporate income tax in favor of a consumption tax in the form of a 7% business activity tax. Under the Simplifying America's Tax System (SATS) plan, pass-through entities could elect to be treated as a corporation for the zero percent rate and all business income would be subjected to only one level of income taxation, consistent with corporate integration.

"In other OECD countries, this is typically known as the credit-invoice value-added tax (or goods-and-services tax), a measure that raises revenue with significantly less economic damage than the corporate income tax," the white paper said, adding that the business activity tax is similar to the consumption tax plan introduced by Senator Ben Cardin (D-MD). "Under the credit-invoice method, businesses collect tax on all of their sales, but that tax is reduced in the form of a credit for tax paid on purchases (i.e. inputs) invoiced from other firms."

The SATS plan would implement a one-time tax on accumulated foreign earnings held abroad by US-based companies at 8.75% for profits held as cash and cash-equivalents and 3.5% on other assets — the same rates proposed by both the House Republican Blueprint on tax reform released June 24 and former Ways and Means Committee Chairman Dave Camp's (R-MI) Tax Reform Act of 2014. Renacci's white paper said revenue generated from the transition tax would be dedicated to the Highway Trust Fund, and that a territorial system of taxing foreign earnings would be unnecessary because of the 0% corporate income tax.

For individuals, the plan would reduce the current seven marginal income tax brackets to three: 10%, 25%, and 35%. All itemized deductions would be eliminated except those for charitable contributions and mortgage interest up to $500,000 of debt, and the alternative minimum tax would be repealed.

The SATS plan would provide a $15,000 standard deduction per filer and a $5,000 personal exemption, such that a family of four would have no income tax liability on their first $50,000 of income. While eliminating most personal credits, the proposal would retain the child tax credit and substantially increase the Earned Income Tax Credit to 100% for childless workers an 40% for all others.

The white paper said Renacci, who serves on the Ways and Means Committee, and his office desire that the plan be the beginning of a conversation on a comprehensive tax reform model, and request general comments, as well as those addressing:

— properly applying a goods-and-services tax to financial services;

— potential exemptions from the business activity tax;

— additional rules necessary to facilitate the option pass-through entities will have to be treated as separate entities subject to the same tax rules as C corporations;

— the potential for individual taxpayers to accumulate passive investment income in the corporate form as a tax avoidance mechanism;

— the potential for corporations to minimize compensation paid to an owner for labor services because compensation payments would not be deductible in calculating the business activity tax;

— distributional/age issues;

— implications for state and local governments;

— concerns that such a goods-and-services tax could too easily contribute to government growth;

— how this proposal might be impacted by either action items from the OECD's Base Erosion and Profit Shifting (BEPS) project or legislation implemented by OECD countries adopting BEPS recommendations;

— lost revenue from nontaxable foreign shareholders of corporations that do business in the United States; and

— transition rules.

Renacci said comments and questions on the plan, which he told reporters he views as an alternative to the recently released House Republican Blueprint, should be submitted to TaxReform.Renacci@mail.house.gov.

The White Paper is attached.

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ATTACHMENT

Tax Reform White Paper