Preliminary Revenue Estimate and Distributional Analysis of the Tax Provisions in A Roadmap for America's Future Act 2010

Preliminary Revenue Estimate and Distributional Analysis of the Tax Provisions in A Roadmap for America’s Future Act of 2010 Joseph Rosenberg The Roadmap for America’s Future Act of 2010 is a detailed reform package that overhauls Social Security, Medicare, Medicaid, and the U.S. federal tax system. In a January 27, 2010, report, the Congressional Budget Office (CBO) analyzed the spending provisions of the plan. This paper presents the Tax Policy Center’s estimates of the revenue and distributional impact of the Roadmap’s tax provisions. A guide to TPC tables related to the act is available at http://www.taxpolicycenter.org/taxtopics/Ryan_Tax_Reform_Tables.cfm. Summary of Key Tax Provisions1 Create an alternative simplified income tax system. The Roadmap would create an alternative federal income tax system, with a broader tax base and a lower, two-rate tax structure. It would eliminate all current deductions and credits2 and exempt income from interest, dividends, and capital gains from the individual tax. Flow-through business income (i.e., income from sole proprietorships, partnerships, and S corporations) would only be taxed to the extent that it represents wage income. Taxpayers could choose to calculate their tax liability under either the current tax system or the simplified tax system. They would have to make their election within the first 10 years and could change tax systems one additional time or whenever they experience a “major life event (death, divorce, or marriage).” Eliminate the estate tax. Consistent with no longer taxing investment income, the plan would repeal the estate tax for taxpayers in the alternative system. Because capital gains would not be taxed, the basis of inherited assets would no longer be an issue. The estate tax would continue for taxpayers who opt to remain liable for the current income tax. Repeal the alternative minimum tax (AMT). The Roadmap would eliminate the alternative minimum tax entirely for all taxpayers regardless of which income tax option they choose. Replace the income and payroll tax exclusion for employer-sponsored health insurance with a refundable credit. The Roadmap would repeal the exclusion for employer-provided health insurance (ESI) for both individual income and payroll tax purposes for all taxpayers. Instead, it would offer a refundable tax credit initially equal to $2,300 for individual filers and $5,700 for joint filers and families. The credit would be indexed by the average growth rate of the consumer price index (CPI) and the medical care component of the CPI. Replace the corporate income tax with an 8.5 percent business consumption tax (BCT). The Roadmap would repeal the corporate income tax and impose an 8.5 percent BCT, a value-added tax (VAT) calculated using the subtraction method, on all businesses (C corporations, S corporations, partnerships, and sole proprietors). Businesses could immediately expense all investment and deduct the cost of employee health insurance. They could not deduct wages and other compensation. Methodology TPC estimated the revenue and distributional effects of the Roadmap using the Urban-Brookings Tax Policy Center microsimulation model. Details regarding the assumptions and additional information used in modeling the Roadmap plan are outlined below. 1 Descriptions of the proposal come from http://www.roadmap.republicans.budget.house.gov/, as well as email and phone communications with the minority staff of the House Budget Committee. The CBO letter is available at http://www.cbo.gov/doc.cfm?index=11048&type=1. 2 Health savings accounts (HSAs) would remain in the alternative system. Contributions to HSAs would be excluded from tax. Urban-Brookings Tax Policy Center -2- TPC Model Assumptions: • ESI exclusion. Estimates assume no change in coverage over time and that premiums grow at rates consistent with CBO current-law projections.3 • Tax-advantaged savings plans. Taxpayers who opt into the simplified income tax system could no longer contribute to IRAs, 401(k)s, or other tax-deferred savings plans that involve up-front deductions. They would, however, continue to pay tax on distributions from existing tax-advantaged accounts. • Taxation of flow-through business income. Under the alternative tax system, only wage income from flow-through businesses would be subject to the individual income tax; any additional profits would be treated as dividends. TPC assumed that wage income for sole proprietorships and partnerships equals 80 percent of the net positive gain reported and that all flow-through income from S corporations (and other schedule E income) is dividend income.4 • Taxpayer choice. We estimate the effect on revenue under two separate assumptions: (i) tax units choose the system that minimizes their total tax liability and (ii) all tax units opt into the simplified system. Other Estimates/Assumptions: • Business consumption tax (BCT)