House GOP budget aims at tax code

@CNNMoney March 20, 2012: 2:29 PM ET
House budget chief Paul Ryan's budget proposal, due out Tuesday, will call for cutting tax brackets to just two - 10% and 25%.

House budget chief Paul Ryan's budget proposal, due out Tuesday, will call for cutting tax brackets to just two - 10% and 25%.

NEW YORK (CNNMoney) -- In a year when political stalemate is expected to block any real progress on fiscal reforms, House Republicans will take a swing at tax reform in their fiscal year 2013 budget proposal due out on Tuesday morning.

House Budget Chairman Paul Ryan and his caucus will call for a reduction in individual tax rates and brackets. Instead of today's six brackets, with rates from 10% to 35%, they are calling for just two -- 10% and 25%. It's not clear how much income would fall under each bracket. (Washington's $5 trillion interest bill)

The Republican proposal, worked out with House Ways & Means head Dave Camp, would also eliminate the Alternative Minimum Tax altogether.

Although originally intended to ensure that the very wealthy pay taxes, the AMT was never structured to keep pace with inflation.

So on paper the AMT is scheduled to bring in trillions of dollars in revenue over the coming years because it would capture more and more taxpayers who are not wealthy. But every year Congress passes costly "patches" to protect the middle class from having to pay the AMT, and adds the cost of those patches to the deficit.

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It was not immediately clear whether the House GOP plans to replace that forecasted revenue, but it seems unlikely since it is proposing to keep revenues as a share of the economy on par with the 40-year average of 18.1% of the economy's GDP.

Since the financial crisis in 2008, revenues as a share of GDP have hit 60-year lows, coming in at around 15%. And going forward, independent budget experts have said the country may need to bring in more revenue than the historical average to meet entitlement benefit promises and adequately fund programs without slashing too deeply in any one area of the budget.

On the corporate tax side, the House GOP would lower the top tax rate to 25% from 35% and switch the United States to territorial system of taxation, meaning that U.S. multinational companies would only owe tax on foreign-made profits to the government of the country in which the profits were made.

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Currently, a U.S. company owes U.S. taxes on foreign profits once the money is brought home, and they can subtract from their Washington tax bill taxes they have already paid to the country where the profits were made. Some estimate that U.S. companies may be parking as much as $1 trillion abroad.

The House GOP proposal on corporate taxes differs from President Obama's. He would lower the corporate tax rate to 28% and impose a minimum tax on foreign-made profits the year they were made to discourage companies from parking money abroad.

And as they have at every turn, House Republicans will reject outright most of Obama's tax proposals for individuals, particularly those on the wealthy, including his proposed Buffett Rule to ensure millionaires pay at least 30% of their income in federal tax.

The emphasis on tax reform in advance of the formal release of the House Republican budget may indicate the GOP's desire to turn the conversation away from their anticipated and polarizing proposals to reform Medicare and to cap discretionary spending at levels lower than the top cap agreed to by both parties last summer.

Democrats have expressed opposition to both prospects.

House Republicans are expected to propose a spending level that is about $20 billion less than that specified by the Budget Control Act, the deal that ended the bitter fight over the debt ceiling in August. If that's the case, that could set off a battle with the Democratic-controlled Senate on federal spending just weeks before the November election.

Meanwhile, the most conservative factions in the House have been pushing for the GOP to propose spending levels lower than those likely to be proposed on Tuesday. To top of page

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