Following yesterday’s release of the GOP tax reform bill, House Ways and Means Committee Chairman Kevin Brady today released mostly technical amendments to the bill. In addition, two provisions were modified.
One provision on the individual side would be implemented in 2018 instead of 2023. In the modification, “income levels would be indexed for chained CPI (Consumer Price Index) instead of CPI, a slightly different measure of inflation.”
Chained CPI factors in the effects of price changes on consumers’ consumption of products, and on average it measures inflation at a level 0.25 percentage points lower than CPI.
Overestimating inflation can place individuals in a higher tax bracket, because it overestimates the true value of their earnings. Underestimating inflation does the opposite—it makes an income look less valuable, and thus can place an individual near the threshold into a lower tax bracket.
A provision titled “Limitation on Treaty Benefits for Certain Deductible Payments” was also struck. The provision would have required that payments of so-called FDAP income to foreign recipients be subject to the current statutory 30-percent withholding tax. FDAP is shorthand for fixed or determinable, annual or periodical income, and can include income in forms such as interest, dividends, rents and annuities.
Income tax treaties often change or eliminate the tax. This allows the federal government to have significant bargaining power in foreign trade agreements.
For a closer look at the full proposal released on Nov. 2, check out MMG’s analysis.
Ben Marsico works on public policy issues for ACG.