13.10: Transitioning

Transition taxpayers from the old tax system.

Other Information:

Transition Arrangements. Special care is needed in transitioning taxpayers from the old tax system to this Heritage tax plan. For example, it is important that taxpayers are not subject to an extra tax burden solely because of the transition. This would amount to retroactive taxation because the higher tax burden would arise from actions taken before tax reform. Thus, all current-law accrued tax "assets"—such as interest on pre-tax reform debt, including existing home mortgages, depreciation, and accrued tax credits—are applicable to taxable income or tax liability under the new tax system until the tax assets are exhausted. As noted above there will be a period over which the business tax rate declines until it matches the individual rate. The shift to taxing only what businesses earn domestically is an important simplification and an important step toward improving international competitiveness. However, many businesses have accrued foreign tax credits under current law that would be inapplicable under the new tax system. To provide adequate time to adjust, businesses will have the option of being taxed under the current system of worldwide taxation for up to 10 years after the enactment of tax reform. It is important to avoid retroactive taxation, but it is equally important to avoid creating tax windfalls caused merely by transitioning from one tax system to another. This would occur especially with respect to savings prior to tax reform ("old savings"), which are invested in various assets generating income streams and capital gains that are subject to immediate taxation at current rates. These tax windfalls, which would be similar to winning a tax lottery, would tend to benefit the wealthiest taxpayers and erode the tax base, thus necessitating a higher tax rate. Thus, a transition system is provided to prevent tax windfalls by ensuring that old savings remain subject to current levels of taxation. In the transition to the new tax system, employers will furnish their employees with a statement on how they will handle that part of the employee's compensation that currently takes the form of the "employer's share" of payroll taxes paid to the Treasury. The options in the statement could include, among others, an adjustment in the employee's cash compensation, a contribution to the employee's savings or retirement account, or an allocation of the money to the employee's income tax withholdings. The Department of Labor would make template forms available on its Web site for employers to use. After the transition, when compensation and tax withholdings are fully adjusted, no further statements would be necessary.

Stakeholder(s):

• Taxpayers

Indicator(s):

Indicator:1

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