Tax Deal Said to be Imminent

According to Democratic leaders interviewed today, President Obama and Speaker Boehner are close to approving a budget deal that would require in 2012 a re-vamping of the tax code to lower individual and corporate rates by modifying or repealing scores of “tax breaks” and other “loopholes.”

Thus, the Speaker and the President appear to be on the verge of accepting the logic of the Bowles-Simpson commission that issued its unofficial report in December, initiating a process that could wring out an overall rate reduction by focusing on tax expenditures.

Which tax expenditures are at risk?  Sen. Tom Coburn’s “Back in Black” report provides useful context, although it has not been endorsed by any other Senator.  In it, Sen. Coburn uses the familiar style of appropriations battles past to highlight what he views as inappropriate use of tax deductions, like the historic preservation credit, the exclusion for foreign-earned income, and (humorously) the tax deduction for Eskimo whaling captains.  

His point is that they should all be repealed immediately and other tax benefits should be sharply limited.   In the face of determined opposition, Coburn takes on the home mortgage interest deduction (cap at $500k of mortgage principal; no second homes) and the exclusion for employer-provided health insurance (cap at $15k for families).  In total, his reforms are said to save $962 billion in tax revenue over 10 years, which is close to the $1 trillion figure touted by the Gang of Six as their goal.   In reality, his proposals would bring in much less than $1 trillion, because taxpayers would change their behavior to minimize tax.  

The leaders will not likely come close to endorsing Dr. Coburn’s prescriptions, but they now seem to be willing to enact procedural changes, such as a the new fast-track process endorsed by the Gang of Six, that would require the tax writing Committees to repeal enough deductions to reach the inflated $1 trillion target. 

This could be a disaster for taxpayers.

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