Senate Finance Looks at Types of Income and Entities

The Senate Finance Committee has been busy churning out options papers on various tax reform topics (we wrote previously about their economic security and international tax papers) and has continued its work last week with two new papers: one on types of income and business entities and another on nonprofits and charitable giving.

The first paper runs the gamut, with options ranging from the narrow, like closing the carried interest loophole, to the ambitious, like integrating the corporate and individual income taxes.

It first details the main concerns with the current individual and business tax system:

  • Overall complexity of having many different rules
  • Differences in tax treatment of different types of business entities
  • Tax bias on debt or equity financing
  • "Lock-in" incentives, or the incentive for corporations to retain their earnings rather than distribute them to shareholders
  • Distinguishing between service and capital income for owners of S corporations
  • Differences in treatment of economically similar financial instruments

The paper then presents various options for addressing these concerns. Options include taxing capital gains and dividends as ordinary income, integrating the individual and corporate income taxes through various methods, reducing interest deductions, taxing corporate accumulated earnings more or giving preferential treatment to dividends, treating carried interest as ordinary income, and reforming the tax treatment of financial products.

The second paper goes into the charitable deduction and the tax treatment of nonprofits. On the former topic, the paper includes a number of broad options like eliminating the deduction, converting it into a credit, making it available to non-itemizers, or changing it into a matching grant. It also includes more targeted options to change the deductibility of certain activities or change how the deduction is calculated for non-cash contributions. On the tax treatment of nonprofits, options include taxing their commercial activity or revising the rules for tax-exempt commercial activity, broadening the tax on unrelated business income, and reforming rules for organizations that engage in political activity (or restricting that activity).

The Finance Committee has added two more options paper to its growing collection. Let's hope they continue to do so and put that information to good use.