What Should A Democratic Response To H.R. 1 Look Like?

What should a Democratic response to H.R. 1 look like?

Some possibilities (excluding the international provisions of H.R. 1 to be dealt with separately).

Tax Rates For Ordinary Income

1. Corporations, trusts and estates: a flat 40%. 

But, corporations receive a new 100% deduction for dividends paid to shareholders subject to U.S. income taxation (the dividends paid deduction would not apply to shareholders not subject to income taxation such as non-profits and foreign investors). Special treatment for dividends received is abolished. Abolish the accumulated earnings tax and the various personal holding company taxes. 

Deny a deduction for distributed income for income distributed by trusts and estates to beneficiaries not subject to income taxation such as non-profits and foreign investors. Trusts with beneficiaries not subject to income taxation also cannot be taxed as "simple trusts".

2. Ordinary income: top rate 36.2% (plus a 3.8% Medicare surtax for investment income that is unchanged). Leave marginal rates of H.R. 1 up to 32% in place (which are capped at $200,000 for individuals and $400,000 for joint filers) and tax all income in excess of the 32% bracket (currently taxed at 35% and 37%) in the top 36.2% bracket.

3. Qualified dividends: Treated as ordinary income to taxpayer.

4. Repeal the 20% (with limitations) Section 199A deduction for passthrough income.

Taxation Of Capital Gains

1. Tax rate for long term capital gains 

Set the rate based upon ordinary income tax rates normalized based upon average holding period in months stacked below other income. 

For example, suppose a taxpayer has a $100,000 capital gain on the sale of an asset that was held for sixty months (i.e. five years). The tax rates that apply would be the tax rates due on $20,000 of ordinary income multiplied by five, plus the 3.8% Medicare surtax, if applicable, under current law. Tax rates for non-capital gains income would be the same as the rates that would apply if the taxpayer had $20,000 of ordinary income in addition to the non-capital gains income. 

Regulations would clarify the application of these rules.

No other special capital gains tax rates would apply except for grandfathered special programs with phase out dates such as the Opportunity Zone tax credit created by H.R. 1.

2. Treat lump sum distributions from retirement accounts that are income in respect of a decedent and other deferred income as capital gains for purposes of determining their tax rate.

3. Repeal the Section 1031 exclusion for like-kind exchanges of real estate prospectively.

4. Retain the exclusion of gain on the sale of a personal residence but increase the holding period from two of five years own ownership and residence, to four of eight years of ownership and residence to make it less useful to house flippers. Fill out the regulations for hardship exceptions with proration.

5. Treat death as a taxable sale of all of a capital assets of the decedent subject to certain exceptions:

* Evaluate the exclusion of gain on the sale of a personal residence without regard to holding periods.

* Allow an election to declare a carryover basis for a specific asset if it is an illiquid asset that is used in an active trade or business, or is a residence.

* Exclude the first $100,000 of capital gains arising due to death (indexed) from income taxation.

6. Treat a gift of a capital asset as a taxable sale of the capital asset subject to one exception:

* Allow an election to declare a carryover basis for a specific asset if it is an illiquid asset that is used in an active trade or business, or is a residence.

Undo Or Modify Select Income Tax Provisions Of H.R. 1

1. Increase the age for the child tax credit from under age 17 to unmarried dependents under age 26, and allow it to include children who don't live with the taxpayer. Make the per child and per dependent tax credits fully refundable. Do not phase out these credits.

2. End the SALT deduction dollar cap.

3. Restore the home mortgage interest deduction to $1,000,000 but don't restore the deductibility of home equity loan interest.

4. Reinstate the personal casualty loss itemized deduction.

5. Reinstate the moving expense deduction and the exclusion for employer paid moving expenses. Indeed, liberalize it.

6. Reinstate the alimony deduction and expand it to include child support as well.

7. Reinstate the following miscellaneous itemized deductions with a 2% floor:

* expenses for the production or collection of income

* tax preparation expenses

* unreimbursed expenses attributable to the trade or business of being an employee, 

* repayments of income received under a claim of right (only subject to the two percent floor if less than $3,000)

* repayments of Social Security benefits

* the share of deductible investment expenses from pass-through entities. 

8. Limit NOL deductions to 80% of income per year (from 90% under H.R. 1) and reinstate the 20 year limitation on carry forwards of NOLs. Establish anti-evasion rules limiting "parked" NOLs.

9. Repeal the interest expense limitation of H.R. 1.

10. Repeal the disallowance of deductions for FDIC premiums.

11. Repeal the exclusion for management of private planes.

12. Make the employer credit for paid family and medical leave under H.R. 1 permanent.

13. Reinstate the employee appreciation award exclusion as it was prior to H.R. 1.

Undo Or Modify Select Non-Income Tax Provisions Of H.R. 1

1. Repeal the excise tax on private college endowments.

2. Reinstate the ACA Individual Mandate penalty.

Reforms Relevant To Estate Planning

1. Reduce the lifetime gift and estate tax exclusion to a flat $5,000,000 and end inflation adjustments of this amount.

2. Close many key loopholes in the gift and estate tax regime:

* End minority interest discounts/control premiums for entities; tax them on pro-rata of entity value.

* Deny the annual exclusion for gifts of interests in entities.

* End the gift tax exclusion for unexercised powers of appointment that lapse (i.e. Crummey powers).

* Include life insurance proceeds in the estate of the decedent, regardless of title, unless no portion of the premiums were paid for by decedent or the decedent's family members with anti-evasion rules.

* Treat taxes paid by grantors of irrevocable trusts that are taxed as grantor trusts as taxable gifts to the irrevocable trust.

* Treat gifts made via grantor retained interest trusts as incomplete until their term expires, and as made upon the sooner of a distribution or the end of the term.

* Repeal the QPRT safe harbor.

* Prohibit gift and estate tax exclusions received from a deceased spouse from being inherited by the new spouse of the person who received a deceased spouse's gift and estate tax exclusion.

3. Repeal the Medicaid estate recovery system and Medicaid liens and mildly relax the allowable assets other than real estate to qualify for the Medicaid nursing home program (and the asset requirements to qualify for other Medicaid programs as well). Eliminate the intent to return requirement for residences.

4. In the case of income in respect of a decedent from retirement type accounts, eliminate non-spousal rollovers and stretch distributions.

New Income Tax Provisions

1. Eliminate or phase out assorted tax breaks for the fossil fuel industry.

2. Add an itemized deduction for home owner's insurance and mortgage insurance to the mortgage interest deduction.

3. Add an itemized deduction for rent paid and renter's insurance for one personal residence for taxpayers (whether individual or filing jointly) who do not own a home up to $30,000 a year (indexed).

4. Repeal the EITC and replace with with a full refundable tax credit against employee/self-employed taxpayer income tax equal up to $1,530 of employee FICA tax paid, with any unused amount doubled an applied to self-employment tax paid up to the remaining amount. This would be applied on a per earner basis, rather than a per tax return basis. Establish a fully refundable employer FICA tax paid credit against employer income tax of up to $1,530 per employee.

New Non-Income Tax Provisions

1. Apply the self-employed health insurance deduction to self-employment tax as well as income tax.

2. Treat tips as self-employment income of the person earning the tips, rather than wage and salary income. Require 1099 reporting of tip income controlled by the employer.

3. Increase gas taxes sufficiently to cover all current highway spending now made out of general funds and convert these taxes from a fixed number of cents per gallon to a percentage of the price of gasoline.

4.  Disallow private activity bonds for sports stadiums.

5.  Create a (mostly symbolic) election allowing religious groups to elect to be taxed under I.R.C. § 527 and to be exempt from the Johnson Amendment as a result.

6.  Increase the FICA taxation cap from $127,200 to $270,000 (the maximum amount considered for 401(k) contributions) with assurance of the solvency of the trust funds without retirement age increases as the first and foremost consideration. Make parallel adjustment in self-employment taxation and the Obamacare tax dollar thresholds.

7.  End the taxation of Social Security benefits.