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Tax Reform Proposals: What They Mean for Employee Benefits
Armey-Shelby Proposal: The Freedom and Fairness Restoration Act of 1995 (H.R. 2060/S. 1050) -- The flat tax proposal introduced by Rep. Dick Armey (R-TX) and Sen. Richard Shelby (R-AL) would lower all tax rates (to 20 percent immediately and to 17 percent after 12/31/97) and allow employers to deduct the cost of business inputs, cash wages, and retirement contributions to defined benefit and money purchase plans. All employers (including tax-exempt employers in the public and private sector) would have to pay taxes on the value of noncash compensation other than retirement contributions. Interest, dividends, and other investment returns would not be subject to taxation. For example, an employer providing health insurance would pay tax (income and FICA) on the value of the insurance.
- Domenici-Nunn Proposal: USA Tax Act of 1995 (S. 772) -- Also known as "The Unlimited Savings Allowance Plan," the proposal of Sen. Pete Domenici (R-NM) and Sen. Sam Nunn (D-GA) would combine an 11 percent value-added tax (VAT) on business, with graduated consumption tax rates, up to 34 percent, on individuals on the annual aggregate value of consumption expenditures. The proposal would allow limited individual deductions for charity, mortgage interest, and education. It would allow unlimited deductions for additions to savings. In addition, earnings on assets would not be taxed immediately. Taxation would occur only when savings and earnings are spent.
- Archer National Sales Tax -- Rep. Bill Archer (R-TX), chairman of the Ways and Means Committee, has advocated eliminating the income tax and replacing it with a broad-based tax on the purchase of goods and services. Archer set forth five "guiding lights" for reform. First, to achieve simplicity and freedom from the Internal Revenue Service as it exists today, all loopholes in the tax code would be eliminated. Second, the new system would be made savings friendly by ending the taxation of interest earned and investments. Third, the "underground economy" would be curtailed by taxing the purchase of goods and services. Fourth, international competitiveness would be improved by removing the tax from U.S. goods sold overseas and adding it to imported goods. Fifth, to assure fairness, those able to spend more would pay more in taxes.
- Gephardt Proposal -- Rep. Richard Gephardt's (D-MO) proposal differs from the other
proposals by providing an income tax with full taxation of interest, dividends, and
capital gains, with progressive rates, and with the elimination of virtually all
deductions except the mortgage interest and standard deductions. His proposal, as
currently stated, would eliminate the favorable tax treatment of all employment-based
health and pension programs by providing for immediate taxation of either the employer or
Definitions of Terms Used in the Table --
Taxable -- the item is considered fully taxable income to the individual.
Deductible -- the item is considered to be eligible for deduction from the individual's and the employer's taxable income.
After tax -- the service is purchased with dollars after income and other taxes are paid.
Deferred -- the item is not included in taxable income for the current year but can be taxed at a later year.
When spent -- means that the income is not directly taxed but a tax is paid when a good or service is purchased with the income.
Tax credit -- the Nunn proposal provides that you would get a credit against income taxes for FICA tax payments, rather than paying income tax on the income that you paid in FICA taxes.
These bills and proposals are in development and are current as of this fact sheet's writing. Nothing herein is to be construed as necessarily reflecting the views of the Employee Benefit Research Institute (EBRI) or the Employee Benefit Research Institute Education and Research Fund (EBRI-ERF) or as an attempt to aid or hinder the passage of any bill pending before Congress.
For more information, contact Ken McDonnell, (202) 775-6342; Paul Yakoboski, (202) 775-6329; or Dallas Salisbury, (202) 775-6322.
Source: Dallas Salisbury, "Employee Benefits in a Flat Tax or Consumption Tax World," EBRI Notes (September 1995): 1-12.
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