Former Clinton Chief of Staff Erskine Bowles and former Republican Senator Alan Simpson, the co-chairs of the President’s National Commission on Fiscal Responsibility and Reform (the “deficit commission”) have released a report that broadly outlines three tax overhaul proposals. These are “The Zero Option,” “Wyden-Gregg Style Reform,” and “Tax Reform Trigger.”
Option 1: The Zero Option
Under the Zero Option, there would be three income tax rates – – a bottom, middle, and top rate — and one corporate rate. Capital gains and dividends would be subject to ordinary income tax rates, and the AMT, the Pease limitation on itemized deductions, and the Personal Exemption Phaseout (PEP) would be eliminated.
Many tax expenditures also would be eliminated, but the extent of elimination would depend on the rates.
The key concept behind the zero options is that the three individual rates, and the corporate rate, would be adjusted to raise a target amount of revenue, based on the value of tax expenditures eliminated.
Under the lowest-rate option in which all tax expenditures are eliminated, the top rate would be 23%. It’s unclear at what income level the lower rates kick in, but they are listed as 8% and 14%.
Recognizing that it is totally unrealistic to propose eliminating all tax expenditures, the Co-Chairs map out three scenarios in which a range of rates is presented next to a list of tax expenditures preserved.
In the scenario closest to the status quo, in which the CTC, EITC, the mortgage interest deduction, and health and retirement benefits are preserved, and we shift to a territorial tax system, the rates are 13%, 21%, and 28% respectively.
Option 2: Wyden-Gregg Style Reform
Using the Wyden-Gregg tax reform proposal as a starting point, the Co-Chairs would repeal AMT, PEP, and Pease, as under the Zero Option proposal. They would establish three income tax rates: 15%, 25%, and 35%, and they would repeal or limit a number of tax expenditures, including:
* the deduction for state & local taxes;
* cafeteria plans;
* the deduction for miscellaneous itemized deductions;
* limit mortgage interest deductions to $500k of borrowing with respect to a primary residence;
* no interest deduction for home equity loans;
* establish a floor of 2% of AGI for charitable deductions;
* cap the exclusion for employer provided healthcare at the actuarial value of the standard -option FEHBP plan;
The Wyden-Gregg based proposal also would reduce the corporate rate to 26%, permanently extend the research and experimentation credit, and eliminate or modify several business tax expenditures:
* the domestic production deduction would be eliminated;
* corporations would be required to use FIFO accounting, instead of LIFO;
* various energy tax preferences for the oil & gas industry would be eliminated; and
* the proposal would modify depreciation rules.
As in the Zero Option plan, the Co-Chairs propose to shift to a territorial international tax system.
Option 3: Tax Reform Trigger
The Tax Reform Trigger option envisions a legislative “trigger” designed to prompt the tax writing committees of Congress to enact comprehensive tax reform by the end of 2012.
If the tax writing committees fail to act, the trigger would impose a “haircut” reduction across-the-board for itemized deductions, the exclusion for employer-provided healthcare, and general business credits.
The haircut would take effect in 2013, and would limit the deductions and exclusions individuals could take to around 85% of the statutory amount by 2015. Corporations would be limited to claiming a percentage of their general business credits.
The haircut would be designed to increase over time if tax reform was not enacted.
Elsewhere in the document, the Co-Chairs make other important tax proposals. First, they would raise the gas tax by 15 cents/gallon over time, beginning in 2013. The increased revenues would be dedicated to the highway trust fund.
In addition, the Co-Chairs would phase in an increase in the wage-base ceiling for Social Security payroll taxes. They do not specify how high it would go. Rather, they specify that the payroll tax base should capture 90% of wages by 2050, up from 86% under present law. That would equate to a substantially higher ceiling than the current OASDI ceiling of $106,800.
Finally, the Co-Chairs would change the way inflation is measured for a wide variety of purposes, including the regular income tax bracket increases. The plan would be to use chained-CPI government wide, instead of CPI. Generally, this would result in lower bracket increases and smaller benefit increases in Social Security and Medicare.
In general, the Co-Chairs proposals are designed to lower income tax rates, simplify the tax code, broaden the base, cut tax expenditures, improve compliance, enhance the competitiveness of U.S. firms, and cut the deficit.
When he introduced the proposal, Co-Chair Alan Simpson remarked that the deficit commission had “harpooned every whale in the ocean.” And, undoubtedly, the co-chairs are bracing for a stormy ride on the high seas, powered by some very aggrieved sea mammals.