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Erskine Bowles and Alan Simpson, co-chairs of President Obama’s Deficit Commission, have released a “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 first option, “The Zero 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.
The Tax Policy center has analyzed the distributional effects of three variants of the Zero Plan:
- Eliminate all tax expenditures—for both income and payroll taxes—except the EITC, the child credit, foreign tax credits, and a few less common preferences.
- Eliminate tax expenditures only for income taxes, not for payroll taxes.
- Eliminate tax expenditures only for income taxes—not for payroll taxes—but cap and restructure the tax benefits for mortgage interest, employer-sponsored health insurance, and retirement saving instead of eliminating them.
A detailed discussion of TPC’s analysis is available here.
Tables showing the distributional effects of the three variants are available here.
Details of the Zero Plan:
The Zero Plan in the Bowles-Simpson “Chairmen's Mark” would:
- Eliminate all tax expenditures—for both income and payroll taxes—except for the child credit, the earned income tax credit, foreign tax credits, a few less common preferences (retain reduced preferences for mortgage interest, employer-sponsered health insurance and reitrement savings in the third variant listed above).
- Eliminate the alternative minimum tax (AMT).
- Eliminate the phaseout of personal exemptions and the limitation of itemized deductions.
- Replace the current six-bracket individual tax rate schedule with a three-bracket schedule with rates of 9, 15, and 24 percent (12, 20, and 27 percent in the third variant listed above).
- Tax capital gains and dividends as ordinary income.
- Index tax parameters using the chained Consumer Price Index.
- Increase the Social Security wage base by 2 percent per year more than the growth in the average wage (making the FICA cap $140,100 in 2015).
- Phase in an increase in the federal excise tax on gasoline of 15 cents per gallon (13.5 cents per gallon on average in 2015).
- Eliminate corporate tax expenditures and reduce the corporate tax rate to 26 percent (27 percent in the third variant listed above).
Details of Alternative Retaining but Limiting More Tax Expenditures:
The third variant would retain tax benefits for mortgage interest, employer-sponsored health insurance, and retirement saving, but restructure them and reduce their costs to 80 percent of their current levels. It would set higher tax rates to make up the revenue lost by those changes and the changes would apply only to income taxes.
Specifically this option would:
- Convert the mortgage interest deduction to a 15 percent refundable interest credit.
- Replace the exclusion from income of employer-sponsored health insurance with flat credits of $1,058 for single coverage and $2,433 for family coverage offered by employers.
- Reduce the limits on contributions to employer-sponsored qualified retirement plans and individual retirement accounts to 43 percent of their current level.
- Cap the amount of tax-free accruals within both defined benefit and defined contribution retirement accounts.
- Replace the current six-bracket individual tax rate schedule with a three-bracket schedule with rates of 12 percent, 20 percent, and 27 percent.
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