O n February 16, 2016, House Speaker Paul Ryan announced the creation of six committee-led task forces to formulate proposals. The Tax Reform Task Force was led by Ways and Means Committee Chairman Kevin Brady. On June 24, 2016, Speaker Ryan released the Tax Reform Task Force Blueprint, or the Better Way tax reform. For the individual income tax, the plan would broaden the base, lower the rates, and alter some of the elements related to family size and structure. For business income, the current income tax would be replaced by a cash-flow tax rebated on exports and imposed on imports, with a top rate of 20% for corporations and 25% for individuals. The proposal would also repeal estate and gift taxes. The repeal of the Affordable Care Act taxes is not in the Better Way tax reform proposal, but these taxes along with subsidies are addressed in the House-passed American Health Care Act of 2017 ( H.R. 1628 ). The border adjustment (tax on imports and rebate on exports) has garnered a lot of attention and, along with international tax issues in general, was the subject of a hearing before the Ways and Means Committee. A recent announcement by congressional and administration leaders indicated that border tax adjustments would be dropped from future tax plans. The effect of eliminating the border tax adjustment will be discussed in the relevant sections. Note that the blueprint is a general outline rather than a detailed proposal, with many features not fully determined. This report reviews the plan as reported in that document. The inclusion of additional features could alter this analysis. This report describes current law and the proposed changes. It discusses economic efficiency, distributional and equity issues, administrative and compliance issues, revenue effects, and other tax-related issues. This section describes the changes in the individual income tax, the treatment of unincorporated business, the corporate tax, and the repeal of estate and gift taxes. The main structural elements of the individual income tax that apply to all taxpayers include the rate structure, the standard deduction or itemized deductions, personal exemptions, and the earned income tax credit. Lower- and moderate-income taxpayers with qualifying children are eligible for a partially refundable child credit. The earned income tax credit (fully refundable) is also available for lower- and some moderate-income taxpayers. Taxpayers at higher incomes are potentially subject to an alternative minimum tax. The blueprint revises all of these elements except the existing refundable child credit and the earned income credit. The values reported below for current law are for 2016, the year the plan was announced. (With low inflation rates, the dollar amounts are similar in 2017.) Most elements of current law are indexed for inflation, including rate brackets and deductions and exemptions. An exception is the child credit. Under current law, tax rates apply at rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% brackets. Rate brackets are wider for joint returns (i.e., married couples) than for head of household (i.e., households with a single head with children), which are in turn wider than returns for single taxpayers. The blueprint proposes three rates: 12%, 25%, and 33%. It would replace the 10% and 15% rate with a 12% rate; the 25% and 28% rates with a 25% rate; and the remaining rates with a 33% rate. The dollar size of the rate brackets would be unchanged. Less than 0.7% of taxpayers are subject to the 39.6% rate, and less than 0.1% to the 35% rate, which applies to a narrow bracket; taxpayers paying at these marginal rates, however, account for 15.6% and 1% respectively of adjusted gross income (AGI). The 33% bracket accounts for 1.3% of taxpayers and 7.1% of adjusted gross income. The most common top marginal tax rate for returns is the 15% bracket, which, in 2014, accounted for 28.9% of taxpayers (who accounted for 21.8% of adjusted gross income, AGI), followed by the 0% bracket, accounting for 24.2% of returns and 1.6% of AGI, then the 10% bracket accounting for 18.4% of returns and 6.5% of AGI. The 25% bracket accounted for 16.6% of returns and 26.6% of AGI. For a small share of taxpayers (6.3%) and AGI (9.6%), the top rate is the capital gains tax rate. High-income taxpayers are also subject to a provision termed a phase out of itemized deductions, but that effectively acts as an additional increase in tax rates of 3%, by increasing taxable income by 3% of AGI up to 80% of itemized deductions. For most taxpayers, the itemized deduction constraint is not binding. In 2016, the phase out began at $259,000 for singles and $311,000 for joint returns. High-income taxpayers are also subject to an additional tax of 3.8% of investment income (including capital gains, dividends, interest, and passive investments in unincorporated business), in excess of $200,000 for single returns and $250,000 for joint returns. There is also a 0.9% tax on wage income exceeding these amounts that goes into the Hospital Insurance Trust Fund. These provisions were enacted in the Affordable Care Act (ACA). The Better Way proposal does not address these taxes but indicates that all taxes imposed by the ACA will be repealed in different task force proposals. Tax brackets are currently indexed for inflation and that feature would be retained. Taxpayers may take a standard deduction or itemize deductions. About 30% of taxpayers itemize their deductions. Taxpayers may take personal exemptions for themselves and their dependents. Personal exemptions are phased out at higher-income levels, and a phase out of itemized deductions is also in place although it effectively operates as an additional tax. In 2016, the standard deduction was $6,300 for singles, $9,300 for head of household returns (single heads with children), and $12,600 for joint returns. The personal exemption was $4,050, and began phasing out at the same levels for itemized deductions. The revision eliminates personal exemptions, but offsets this elimination for the taxpayer with a larger standard deduction: $12,000 for singles; $18,000 for head of household returns, and $24,000 for joint returns. The plan adds a nonrefundable credit of $500 for dependents (child or non-child), again an offset for eliminating the personal exemption for dependents. The plan eliminates all itemized deductions except for mortgage interest and charitable deductions. The most important deduction eliminated is the state and local taxes (income, sales, and property) deduction. Although the standard deduction and current personal exemption are indexed for inflation, the blueprint would index the standard deduction, but apparently not the child and dependent credit. The credit will also apparently phase out at a lower-income level than the personal exemptions: $75,000 for single and $150,000 for joint returns. Current law imposes an alternative minimum tax that applies a lower tax rate of 26% (and 28% at higher-income levels) to a broader base with a large flat deduction, which is indexed for inflation. The primary provisions added back to the base are personal exemptions, the standard deduction, and itemized deductions for state and local taxes. This tax applies only to relatively high-income individuals, but does not affect the very highest income levels. The blueprint would repeal this tax. Current law provides for a fully refundable earned income tax credit, with a significantly higher rate for families with children. It also provides a $1,000 per child partially refundable credit. Both provisions are phased out as income rises. The blueprint leaves these provisions in place, except that it increases the child credit phase-out starting point for joint returns (from $110,000 to $150,000), making it twice the phase-out starting point for singles ($75,000). The phase-out levels for the earned income credit are indexed for inflation; the child credit level and phase-out levels are not: these features are retained. Under current law, interest income is taxed at ordinary rates. Dividends and capital gains are subject to lower rates: a zero rate for individuals with ordinary rates in the 15% bracket or below and 15% for those in higher brackets, except that high-income returns at the beginning of the top, 39.6%, bracket (for 2016, above $441,000 for single returns, $441,000 for head-of-household returns, and $466,950 for joint returns) are subject to a 20% rate. There are higher rates for capital gains arising from prior depreciation and for collectibles. The proposal would tax 50% of capital gains, dividends, and interest at ordinary rates. Thus the rates would be 6% for the new 12% bracket (rates were formerly zero for capital gains and dividends and 10% or 12% for interest), 12.5% for the 25% bracket (formerly 15% for capital gains and dividends and 25% or 28% for interest), and 16.5% for the 33% bracket (formerly 15% and 20% for capital gains and dividends and 33%, 35%, and 39.6% for interest). Business income earned from pass-through businesses taxed under the individual income tax (including sole proprietorships, partnerships, and Subchapter S firms with limited numbers of stockholders that are incorporated but can elect to be taxed as unincorporated businesses) is currently subject to ordinary rates. The blueprint applies a maximum rate of 25%. Earnings will be allocated to reflect the labor services of the owner-operator, which will be taxed at regular rates.