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Sunday, April 4, 2010

Tax Reform: An Overview of Proposals in the 111th Congress

James M. Bickley
Specialist in Public Finance

Tax reform is of congressional interest in the 111th Congress. This report primarily covers fundamental tax reform because CRS reports are available online concerning the other three categories of tax reform: tax reform based on the elimination of the individual alternative minimum tax (AMT), proposals for reforming the corporate income tax, and proposals for reforming the U.S. taxation of international business. Most proposals for fundamental tax reform involve the concept of replacing the current income tax system with some form of a consumption tax, usually with a single or "flat tax" rate. Other proposals would significantly broaden the income tax base and lower tax rates. Proponents of these tax revisions often maintain that they would simplify the tax system, make the government less intrusive, and create an environment more conducive to saving. Critics express concern about the distributional consequences and transitional costs of a dramatic change in the tax system. For those fundamental tax reform proposals involving shifting to a consumption tax, one or more of the following four major types of broad-based consumption taxes are included in these congressional tax proposals: the valueadded tax (VAT), the retail sales tax, the consumed-income tax, and the flat tax based on a proposal formulated by Robert E. Hall and Alvin Rabushka of the Hoover Institution. As of March 17, 2010, the following bills for fundamental tax reform have been introduced: Representative David Dreier's proposal (H.R. 99), Representative John Linder's proposal (H.R. 25), Senator Saxby Chambliss's proposal (S. 296), and Senator Arlen Specter's proposal (S. 741), Representative Michael C. Burgess's proposal (H.R. 1040), Senator Lamar Alexander's proposal (S. 963), Senator Richard C. Shelby's proposal (S. 932), Representative Paul D. Ryan's proposal (H.R. 4529), Senator Jim DeMint's proposal (S. 1240), Senator Ron Wyden's proposal (S. 3018), and Representative Chaka Fattah's proposal (H.R. 4646). Companion bills are H.R. 25/S. 296 and H.R. 1040/S. 963. 

A temporary patch for 2009 for the individual alternative minimum tax (AMT) was included in American Recovery and Reinvestment Tax Act of 2009 (P.L. 111-5). The patch increased the individual AMT exemption amount and allowed personal credits against the AMT. The FY2010 budget resolution conference report (S.Con.Res. 13) provides for three years of relief from the AMT, through 2012, without the need for any revenue offset. 

In the 111th Congress, options for reforming the federal business income tax are under consideration. The concept of lowering the marginal corporate income tax rate and broadening the corporate income tax base has been advocated by some Members of Congress, including Representative Charles B. Rangel, Chairman of the House Ways and Means Committee. Other options for reform include corporate tax integration and the replacement of the income tax system with a consumption tax. 

The current system of U.S. taxation of international business is complex and difficult to administer. Furthermore, critics argue that the current system is not sufficiently neutral, which results in economic inefficiency. Proposals to reform the system include the replacement of the current hybrid system with either a territorial tax system or a residence based system. In the FY2011 Budget, the Obama Administration proposed numerous changes in the U.S. international tax system that would raise revenue through "reforms" and closing "loopholes."

Date of Report: March 19, 2010
Number of Pages: 18
Order Number: R40414
Price: $29.95

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