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Thursday, November 11, 2010

Deficit Commission Co-Chairs Issue Their Draft Proposals

On November 10, 2010, the co-chairs of President Obama's Deficit Commission - Erksine Bowles and Alan Simpson released a draft of their proposal and a document showing how a variety of cuts could generate $200 billion of savings by 2015 (part of their recommendation package).

The draft (in the form of a Powerpoint presentation) starts with ten "guiding principles and values." At least two of them refer to tax changes - #7 on cutting spending includes spending in the tax law ("tax expenditures") and #9 specifically refers to tax reform. They highlight that their draft proposal "reduces tax rates, abolishes the AMT, and cuts backdoor spending in the tax code." For the area of tax reform, the co-chairs present three tax reform options.

The 10 principles and values are:

  1. We have a patriotic duty to come together on a plan that will make America better off tomorrow than it is today.
  2. The Problem Is Real –the Solution Is Painful –There’s No Easy Way Out –Everything Must Be On the Table –and Washington Must Lead
  3. It Is Cruelly Wrong to Make Promises We Can’t Keep
  4. Don’t Disrupt a Fragile Economic Recovery
  5. Protect the Truly Disadvantaged
  6. Cut and Invest to Promote Economic Growth and Keep America Competitive
  7. Cut Spending We Simply Can’t Afford, Wherever We Find It
  8. Demand Productivity and Effectiveness
  9. Reform and Simplify the Tax Code
  10. Keep America Sound Over the Long Run

The 3 tax reform options are:

1. The Zero Plan - highlights per the co-chairs:

  • Consolidate the tax code into three individual rates and one corporate rate
  • Eliminate the AMT, Pease, and PEP
  • Eliminate all $1.1 trillion of tax expenditures
  • Dedicate a portion of savings to deficit reduction and apply the rest to reduce all marginal tax rates
  • Add back in any desired tax expenditures, and pay for them by increasing one or all of the rates from their zero-expenditure low

That really does say "eliminate all $1.1 trillion of tax expenditures"! The co-chairs suggest that doing so would allow the three individual rates to be 8%, 14% and 23% with a corporate rate of 26%. If the child credit and EITC were kept, the rates would be 9%, 15% and 24%.

2. Wyden-Gregg Style Reform

I have a brief summary of this - here.

3. Tax Reform Trigger - described as follows:

  • Call on Finance and Ways & Means Committees and Treasury to develop and enact comprehensive tax reform by end of 2012
  • Put in place across-the-board “haircut” for itemized deductions, employer health exclusion, and general business credits that would take effect in 2013 if reform is not yet enacted
  • Haircut would limit proportion of deductions and exclusions individuals could take to around 85%* in 2015. Similarly, corporations would only take some proportion of their general business credits
  • Set haircut to increase over time until tax reform is enacted

I am impressed at the boldness of the proposals as a good starting point for serious discussion of serious budget - spending and tax, issues. For example, noting what the tax rates could be with elimination of all tax expenditures should bring sunshine to the types of spending in the tax law and whether it is really needed. Elimination of all or many tax expenditures will make the tax law simpler and allow for lower tax rates.

I still need to read more and would like to see something beyond the bullet-point Powerpoint, but I think this is a good start that they are serious about highlighting that we need serious proposals to address serious problems!

Of course, it remains to be seen if the commission will be able to reach the necessary 14 out of 18 votes for consensus. But if not, the proposal of the co-chairs should be used by President Obama and the 112th Congress to get moving to resolve issues sooner rather than later because they just get harder to fix the longer we let them stay.

What do you think?

2 comments:

Lisa LZJ said...

Interestingly, at about the same time the proposal was released by the President's fiscal commission, there is also another proposal,calling for drastic cost cutting and a new 6.5% national sales tax.

This proposal was forwarded by former Senator Pete V. Domenici and former Clinton administration budget director, Alice M Rivlin. The 6.5% national sales tax will be offset by a combination of a one year payroll tax "holiday" and lower overall income tax rates.

Many deductions and credits will be eliminated in favor of a flat 15% credit which is more equitable to taxpayers.

However, I find it interesting that they went on to cite their proposal as "simpler and pro-growth". It is arguably simple to eliminate the old complex rules for deductions and credits, but it is not any simpler or pro-growth to have a national sales tax at all. The structure of a sales tax is just simply flawed. States already implementing the sales tax cannot solve pyramiding issues (causing multiple layer of taxes on business inputs) and cannot capture cross-border transactions (causing loss of revenue and a significant tax gap).

And the plan calls for a one year payroll tax "holiday" that is believed to ignite growth, possibly through encouraging increased productivity of American workers. This "temporary measure" is alike to the one off Homebuyer Credit which caused a blip in (housing) spending, but tapered off once the credit expired. It is simply unsustainable.

But both proposals did have similarities in that they both called for extreme austerity measures. Drastic cuts in spending coupled with a tax reform which we badly need to balance our budget. An interesting comparison of both plans by IHT on the link below:
http://www.nytimes.com/imagepages/2010/11/18/us/politics/18fiscalGrfxA.html?ref=politics

And a good article summarizing the proposal from Pete V. Domenici and Alice M Rivlin below:
http://www.bloomberg.com/news/2010-11-17/rivlin-proposes-6-5-national-sales-tax-as-part-of-deficit-reduction-plan.html?cmpid=wsdemand

J said...

The elimination of tax expenditures should be balanced out with lower tax rates to make sure tax collections from taxpayers for their given income level remain the same. To eliminate deficit, the government should first encourage economic growth rather than increase tax revenue. Our goal should be for economic recovery and high employment eventually to bring in additional revenue. As private investments are important factor for economic growth, the government needs to encourage individual investments and thus individual tax rate should not be increased. However most deficit reduction plans including those put forward by President Obama's deficit reduction commission, don't lower rates enough to make up for eliminating tax expenditures. Consequently, they raise taxpayers’ tax burden. The report of the President's deficit reduction commission seeks to lower individual income tax rates to 8%, 14%, and 23% and the corporate rate, now 35%, to 26%, and eliminate all tax expenditures. It sounds like taxes would be lower, but this would raise $900 billion over 10 years. So there is net revenue gain to government. According to the proposal recently unveiled by Erskine Bowles and Alan Simpson, the co-chairmen of the president's bipartisan fiscal commission, http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/CoChair_Draft.pdf, a way to cut budget deficits is to reduce tax expenditures rather than raise tax rates. That would increase revenue without reducing incentives to work, save or invest. However if elimination of tax expenditures is not balanced out with lowers tax rates, the effective tax rate is increased and as a result individuals pay substantially higher taxes on the same income. Higher taxes mean that families will have less money to consume and to cycle through the economy. Higher taxes and higher marginal tax rates mean that individuals will work less, hire fewer employees, invest less in their businesses, and look to invest more resources overseas. Decreased consumption and investments from private sector will finally choke economic growth and result in even larger deficit.