President Obama’s Deficit Commission issued its final report, The Moment of Truth, on December 1, 2010. The report lays out a broad plan to reduce the federal deficit by cutting spending and raising taxes. The plan includes various options that would impose different changes on the tax side of the fiscal equation. The principal focus is on an illustrative plan to reform and restructure both individual and corporate income taxes. That plan would, among other things, pare away most tax expenditures, devote $80 billion annually to reduce the deficit, and use remaining revenue gains to cut tax rates. On the corporate tax side, it would also shift the U.S. to a territorial tax system.
The Tax Policy Center has analyzed the distributional effects of the illustrative plan as well as earlier proposals from the Commission’s chairs.
Tables showing the distributional effects of the final report’s illustrative plan and of earlier proposals are available HERE.
Details of the Illustrative Tax Reform Plan:
The “illustrative tax reform plan” in the Commission’s final report would:
- Replace the current six-bracket individual tax rate schedule with a three-bracket schedule with rates of 12, 22, and 28 percent
- Eliminate the alternative minimum tax (AMT)
- Eliminate the phaseout of personal exemptions and the limitation of itemized deductions
- Eliminate itemized deductions but retain standard deduction and personal exemptions
- Tax capital gains and dividends as ordinary income
- Eliminate tax expenditures for income taxes with the following exceptions:
- child credit and earned income tax credit (EITC)—maintain, including expanded benefits in 2009 stimulus law
- mortgage interest deduction—replace with 12 percent non-refundable credit for all taxpayers for mortgages on principal residence only; mortgage capped at $500,000
- exclusion of employer-sponsored health insurance—cap exclusion at 75th percentile of premiums in 2014 (frozen through 2018, phased out by 2038); reduce excise tax on high cost health plans from 40 percent to 12 percent
- charitable giving deduction—replace with 12 percent non-refundable credit for contributions in excess of 2 percent of adjusted gross income (AGI)
- exclusion of interest on state and municipal bonds—tax interest only on newly-issued bonds
- retirement savings—maintain basic preferences, but consolidate retirement accounts and cap annual tax-preferred contributions at lower of $20,000 or 20 percent of income; expand savers’ credit
- defined benefit pensions
- Eliminate corporate tax expenditures and reduce the corporate tax rate to 28 percent
- Move to territorial tax system for active foreign-source income (maintain current law for passive foreign-source income)
- Social Security—increase taxable wage base gradually so that it includes 90 percent of wages by 2050; decouple from cost-of-living increases in benefits
- Increase the federal excise tax on gasoline by 15 cents per gallon gradually between 2013 and 2015
- Use the chained Consumer Price Index (CPI) to adjust all indexed tax parameters
Earlier Commission Proposal
In November 2010, Erskine Bowles and Alan Simpson, co-chairs of the Commission, released their “Chairmen’s Mark,” a broad plan to reduce the federal deficit by cutting spending and raising taxes. The plan includes various options that would impose different changes on the tax side of the fiscal equation.
The Tax Policy center analyzed the distributional effects of three variants of tax proposals in the first option in the Chairmen’s Mark, “The Zero Plan.” Like the Commission’s final plan, the Zero Plan would pare away most tax expenditures, devote $80 billion annually to reduce the deficit, and use remaining revenue gains to cut tax rates.
Detailed discussion of TPC’s analysis of co-chairs’ Zero Plan is available HERE.
A brief summary of the co-chairs' Zero plan is available HERE.
Tables showing the distributional effects of three variants of the Zero Plan are available HERE.