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JOHN SCOTT: Tax code, meet today’s reality

John Scott

John Scott

As springtime blooms and a seemingly never-ending winter fades, a noteworthy but broadly overlooked set of tax proposals was released by the House Ways and Means Committee in Washington. These serve as an opening bid on how Republicans view the future of the Internal Revenue Code. They are interesting as much for what they say implicitly as they are for their actual content.

Now, first a caveat. These proposals, just like some issued earlier by Senate Democrats, are not close to becoming law and certainly will not be enacted during 2014. Neither party’s leadership has shown the political will or ability to compromise on much of anything. In fact, many pundits believe that any sort of major tax bill would be stalled until there is a new president in office in 2017 anyway.

Regardless, the Republican proposals are telling.

The starting points are promising. There are only two listed tax brackets — 10 percent and 25 percent (the current highest marginal bracket is 39.6 percent). This is consistent with Republican views that 25 percent is a good maximum rate for individuals and businesses.

However, the first big surprise in the proposal is a 10 percent surtax on those couples with “modified” adjusted gross income over $450,000 and singles over $400,000. The “modifications” are even more interesting. Included are such traditionally tax-excludible items as tax-exempt interest, employer provided medical coverage, various retirement plan deferrals and others.

Next, turn to itemized deductions. Wholesale changes are proposed to scale back or eliminate these. State and local income taxes would no longer be deductible. The deduction for home mortgage interest would face new and significant limitations. Even charitable contributions would not be fully deductible and there would be no deduction for such items as medical expenses, personal casualty losses and employee business expenses.

On the business side, the top rate would be reduced from 35 percent to 25 percent over a five-year period, but many popular deductions would be eliminated or significantly slowed, such as depreciation. Many standard and accepted accounting methods would be removed from the tax code, such as LIFO inventory and like-kind exchanges. Most tax credits would be gone. Many more shareholders of S corporations and members of LLCs would be subject to self-employment taxes on their earnings. Myriad other revenue raising provisions are also included.

So, what does this really say? Remember, this is the Republicans’ plan ….

Well, first of all, it says that there is no way to have a 25 percent maximum tax rate in this country without eliminating a whole host of items that have strong popular support. Even then, you end up with the aforementioned surtax. Second, the very idea of tax simplification is completely at odds with this offering. Finally, fiscal constraints related to current and future spending commitments for entitlements, interest on the national debt, defense, homeland security, etc., etc., limit any possible latitude.

OK, so what’s the good news?

Hey, it’s springtime! Go out looking for that four leaf clover. It will certainly be easier to find than that 25 percent maximum tax rate.

» John Scott, CPA, is a tax partner at HORNE LLP and has more than 25 years of public accounting


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