TESTIMONY OF THE STAFF OF THE JOINT COMMITTEE ON TAXATION 

BEFORE THE HOUSE WAYS AND MEANS TAX POLICY SUBCOMMITTEE

HEARING ON FUNDAMENTAL TAX REFORM PROPOSALS1

APRIL 13, 2016

My name is Thomas Barthold. I am the Chief of Staff of the Joint Committee on 

Taxation. The purpose of today’s hearing is to discuss issues arising in attempting to reform the 

Federal tax system. Beginning 100 years ago, the Congress has relied primarily on the income 

tax to fund the Federal government. While considering alternatives,2 in the Tax Reform Act of 

1986 the Congress and President Reagan decided to reform the existing Federal income tax 

generally by broadening the base of income tax and lowering statutory tax rates. 

In this subcommittee’s hearing on March 22, 2016, Members of Congress presented 

proposals that would reform the Federal tax system by shifting the tax base from an income tax 

base to what economists refer to as a consumption tax base. For today’s hearing, Chairman 

Boustany and Ranking Member Neal have asked me to briefly review the legislation introduced 

by former Ways and Means Committee Chairman Dave Camp in the 113th Congress, H.R. 1, the 

“Tax Reform Act of 2014.”3 That legislation, like the Tax Reform Act of 1986, proposed 

broadening the base of income tax while lowering statutory tax rates.

1

 This document may be cited as follows: Joint Committee on Taxation, Testimony of the Staff of the Joint 

Committee on Taxation Before the House Ways and Means Tax Policy Subcommittee Hearing on Fundamental Tax 

Reform Proposals (JCX-26-16), April 13, 2016. This document can also be found on the Joint Committee on 

Taxation website at http://www.jct.gov. 

2 Department of the Treasury, Tax Reform for Fairness, Simplicity, and Economic Growth, 1984, vols. 1-3.

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 H.R. 1 (113th Cong.), introduced December 10, 2014, by then Chairman Dave Camp. Additional Joint 

Committee on Taxation staff analysis of H.R. 1 can be found in Technical Explanation, Estimated Revenue Effects, 

Distribution Analysis, and Macroeconomic Analysis of the Tax Reform Act of 2014, A Discussion Draft of the 

Chairman of the House Committee on Ways and Means to Reform the Internal Revenue Code (JCS-1-14), 

September 2014. This document can also be found on the Joint Committee on Taxation website at 

http://www.jct.gov.

JOINT COMMITTEE ON TAXATION

April 13, 2016

JCX-26-16

 
In assessing any tax system or reform, policymakers make their assessment across four 

dimensions.

1. Does the tax system promote economic efficiency? That is, is the tax system 

neutral or does it create biases in favor of or against certain economic activities 

when compared to choices taxpayers would make in the absence of taxes?

2. Does the tax system promote economic growth? How does the tax system affect 

the potential for citizens to be better off in the future than they are today?

3. Is the tax system fair? Are similarly situated individuals treated similarly? Are 

tax burdens assessed recognizing that different taxpayers have different abilities 

to pay?

4. Is the tax system administrable for both the taxpayer and the Internal Revenue 

Service? Does the tax system economize on compliance costs by taxpayers and 

administrative costs of the tax administrator?

There may, of course, be other important policy considerations. 

How one addresses these questions shapes the reform. It is invariably the case that these 

different policy goals are in conflict. Policy design to promote economic neutrality may conflict 

with goals of fairness. Policy design to promote fairness may lead to complexity and increased 

compliance costs. Among the goals former Chairman Camp set as additional constraints were 

maintaining budget neutrality as conventionally estimated, maintaining the current distribution of

tax burdens across income groups, and not achieving low tax rates on C corporate business 

income at the expense of higher taxes on pass through business income. There are always 

tradeoffs. Former Chairman Camp’s introduced legislation is the result of such tradeoffs.

Taxation of Individual Income

H.R. 1 reduces the top effective marginal tax rate on individual income to 35 percent, 

broadens the tax base by repealing a number of itemized deductions and credits, and simplifies 

tax filing by increasing the standard deduction.

Rate reduction

• Reduces effective marginal tax rates on individual income to 10, 25, and 35 percent.

a. 40 percent deduction for individuals’ dividends and capital gains (creating 

effective marginal tax rates of 6, 15, and 21 percent).

Base broadening

• Repeals deduction for all State and local taxes.

• Modifications of other deductions (e.g., charitable deduction, mortgage interest 

deduction, moving expense deduction).

• Repeals dependent care credit.

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• Repeals non-business energy property credit, credits for energy-efficient property, 

and credits for alternative fuel vehicles.

• Repeals or modifies certain other exclusions (e.g., exclusions for employee fringe 

benefits). 

Simplification

• Increases the standard deduction and repeals deduction for personal exemptions.

• Repeals the individual alternative minimum tax (“AMT”).

• Consolidates tax incentives for education.

a. Repeals seven different tax incentives for education.

b. Modifies and makes permanent the American Opportunity Tax Credit.

Reducing income tax rates and broadening the tax base may promote growth by 

increasing labor supply and eliminating distortions that create non-neutralities in the 

marketplace. However, these measures also have distributional consequences, and H.R. 1 

maintains distributional neutrality by increasing the child tax credit, modifying the earned 

income tax credit, and increasing the standard deduction (among other measures).

Taxation of Business Income

H.R. 1 promotes investment by reducing the corporate income tax rate to 25 percent, but 

at the same time increases the cost of capital through several base-broadening measures.

Rate reduction

• Reduces corporate income tax rate to 25 percent.

• Repeals corporate AMT.

• Modifies and makes permanent the research credit.

a. Repeals the traditional 20 percent research credit and energy research credit.

b. Makes permanent the alternative simplified method (increases rate to 15 percent) 

and basic research credit (reduces rate to 15 percent and changes the base period 

from a fixed period to a three-year rolling average).

c. Eliminates the research credit for computer software, removes supplies from 

definition of qualified research expenses, and eliminates ability to claim a reduced 

research credit in lieu of reducing research and development costs otherwise 

allowed.

Base broadening

• Changes depreciation rules.

a. Expands expensing permitted under section 179.

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b. Allows bonus depreciation to expire.

c. Requires straight-line method of cost recovery over applicable recovery period.

d. Makes available election to index basis to chained consumer price index for all 

urban consumers (“CPI-U”).

• Requires amortization of 50 percent of advertising expenditures over 10 years.

• Requires amortization of research and experimentation expenditures over five years.

• Repeals last-in, first-out (“LIFO”) and lower of cost or market (“LCM”) methods of 

accounting.

• Phases out section 199 domestic production activities deduction.

• Repeals 23 energy-related tax incentives.

• Repeals other business credits (e.g., FICA tip credit, rehabilitation credit, Work 

Opportunity Tax Credit (“WOTC”), railroad track maintenance credit).

• Limits net operating loss (“NOL”) deduction to 90 percent of taxable income.

• Repeals private activity bonds.

Simplification

• Repeals corporate AMT.

While the base-broadening measures of H.R. 1 increase the cost of capital, they can lead 

to a more efficient pattern of investment by eliminating non-neutralities created by tax incentives 

that benefit specific types of investment.

Taxation of Cross-Border Income

H.R. 1 establishes a 95 percent participation exemption system that reduces residual U.S. 

income tax liability on foreign-source income earned through controlled foreign corporations, 

effectively lowering the rate of tax applicable for repatriated foreign-source income to 1.25 

percent. However, the bill also establishes a new category of subpart F income—foreign base 

company intangible income—that, while taxed at a reduced rate of 15 percent, broadens the 

income base that is subject to current taxation by the United States.

Joint Committee on Taxation Staff Analysis of H.R. 1 (FY 2014-2023)

Revenue estimate

• H.R. 1 is roughly revenue neutral, raising $3 billion over the budget period.

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• For reference, the Congressional Budget Office projects individual income tax 

receipts of $21.7 trillion and corporate income tax receipts of $4.0 trillion over FY 

2017-2026 under present law.

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Distributional analysis

• Average tax rates under present law and H.R. 1 are estimated to be similar across the 

income distribution over the budget period.

a. JCT staff analysis distributes the corporate tax burden.

Macroeconomic analysis

• H.R. 1 is estimated to result in the following changes in aggregate economic activity 

(depending on the macroeconomic model used):

a. Increase in real gross domestic product (“GDP”) by between 0.1 percent and 1.6 

percent by the end of the budget period.

b. Change in private business investment between -0.6 percent and 0.1 percent.

c. Increase in labor force participation between 0.3 percent and 1.5 percent.

d. Increase in private sector employment between 0.4 percent and 1.5 percent.

e. Increase in household consumption between 0.4 percent and 2.1 percent.

4

 Congressional Budget Office, Updated Budget Projections: 2016-2026, March 2016, p. 2.

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