A Tax Reform Proposal That Doesn’t Target Retirement Plans

Tax reform proposals often target at least some of the so-called “preferences” accorded workplace retirement savings. Here’s one that claims to preserve them.

Sen. Ben Cardin (D-Md.), a member of the Senate Finance Committee, has reintroduced the Progressive Consumption Tax Act (PCTA) (S. 3529), legislation that he claims would eliminate income tax liability for most Americans and reduce the corporate income tax rate to one of the lowest among industrialized nations.

According to a press release, the bill “changes the way the federal government raises revenue” by taxing the purchase of goods and services. Designed to be at least as progressive as today’s tax system, Cardin says that low- and middle-income families would be protected from unfair consumption taxation through a rebate, and important benefits would be retained in a much simpler income tax code (Cardin preserves tax benefits associated with the charitable contribution deduction, the state and local tax deduction, and the mortgage interest deduction, as well as for health and retirement benefits).

The PCTA sets what it terms the “progressive consumption tax,” or PCT, at a single rate of 10%. Cardin says that it is designed as a “credit invoice” method consumption tax that would be compliant with WTO rules, and that since the U.S. is a low-tax country compared to other advanced-economy countries, the final PCT rate – if any change is made – will likely be set at a rate well below the current OECD average (about 19%), according to the press release.

The revenues generated by this new system would be used to eliminate income tax liability for most American households via what are called “family allowances,” set at $100,000 for joint filers, $50,000 for single filers, and $75,000 for head-of-household filers. The family allowances are indexed for inflation. For those above those limits, the top marginal individual income tax rate, applying to taxable income over $500,000 for joint filers, would be 28% versus the current top marginal rate (applying to taxable income over approximately $450,000 for joint filers) of 39.6%.

In addition, the bill would slice the corporate rate by more than half, to 17%.

For those concerned about the amount of income such a tax might put in the hands of the government, a revenue circuit breaker tied to Gross Domestic Product (GDP), is built into the Cardin system to set “reasonable limits” on the amount of income generated by the new progressive consumption tax.

Cardin notes that this updated version of the PCTA contains several refinements based on stakeholder input received since 2014, and that it is being reintroduced in the current Congress to “provide an opportunity for further review and to show what responsible legislation that moves towards a consumption-base could look like as tax reform discussions move forward in 2017.”

Tax reform has been a priority for President-elect Trump and several of his cabinet nominees, as well as for leadership in the GOP-controlled House of Representatives.

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