Early in November 2005 the President’s Advisory Panel on Tax Reform issued its report and recommendations for making the tax code “simpler, fairer, and more conducive to economic growth.” The report provides two possible tax reform options: a “Simplified Income Tax Plan,” and a consumption-based “Growth and Investment Tax Plan.” The Simplified Income Tax Plan would end the current tax treatment of PTPs and other large partnerships, erasing the advantages that PTPs now enjoy over corporations. The Growth and Investment Tax Plan would allow flow-through treatment to continue but would substantially reduce the tax differences between corporate and partnership structures.
The Simplified Income Tax Plan would allow small and medium-sized businesses to continue using pass-through entities, albeit under a streamlined system; however, all large entities–those with more than $10.5 million in receipts–would be taxed at the entity level, paying a 31.5% rate. All “tax preferences” other than accelerated depreciation would be eliminated as would be the deduction for state and local income taxes. Double taxation would be eliminated by excluding from taxation the value of dividends paid out of profits on which the business has already paid U.S. tax. Businesses would be required to notify their shareholders of the portion of dividends which was not paid out of already-taxed income. All capital gains except gains on stock in U.S. corporations would be taxed at the regular income tax rate.
The Growth and Investment Tax Plan would impose a flat tax on all business cash flow, defined as sales or receipts minus the cost of materials, labor services, and the purchase of business assets. The 30% tax would be imposed on all businesses other than sole proprietorships, regardless of their legal structure. Partnerships and other pass-through entities could continue to flow through the tax through to their owners, but the tax rate on all business structures would be the same, and would be the same as the top individual tax rate. All business investments would be expensed in the year incurred. Interest paid would not be deductible, but interest received by businesses would not be taxed. Dividends, interest, and capital gains would continue to be taxable to individual recipients at a 15% rate, unless held in a tax-exempt savings account.
No action was ever taken on these proposals; however, they provide an example of the types of changes that might be proposed in future tax reform efforts.
Full Text of Advisory Panel Recommendations
- Executive Summary
- Chapter One: The Case for Reform
- Chapter Two: How We Got Here
- Chapter Three: Tax Basics
- Chapter Four: Our Starting Point
II. Chapters 5-7
- Chapter Five: The Panel’s Recommendations
- Chapter Six: The Simplified Income Tax Plan
- Chapter Seven: The Growth & Investment Tax Plan
III. Chapters 8-9
- Chapter Eight: Value-Added Tax
- Chapter Nine: National Retail Sales Tax