After months of intense debate, President Obama’s National Commission on Fiscal Responsibility and Reform has issued its final report, titled “The Moment of Truth", with recommendations to help save the American dream.
The Commission was created in February to make recommendations on how to balance the federal budget by 2015 and meaningfully improve the country’s long-term fiscal outlook, including making changes to address the growth of entitlement spending. The bipartisan commission brought members of Congress together with representatives from the private sector to come up with a comprehensive list of suggestions.
Commission Co-Chairmen Alan Simpson, a former Republican senator from Wyoming, and Erskine Bowles, Chief of Staff to President Clinton, had released a draft version of the report last month.
The report’s recommendations for tax reform begin with the observation that “America’s tax code is broken and must be reformed” and set out an overall vision that “Tax reform should lower tax rates, reduce the deficit, simplify the tax code, reduce the tax gap, and make America the best place to start a business and create jobs.”
In its specific suggestions for how to accomplish this, the report proposes “eliminating all income tax expenditures” with no exemptions, deductions or credits. Congress and the President would then “decide which tax expenditures to include in the tax code in smaller and more targeted form than under current law”.
It also suggests that the government:
- Create three tax brackets, with tax burdens of 12%, 22% and 28% of income.
- Repeal the Alternative Minimum Tax (AMT) and “PEP and Pease” (the phase out of personal exemptions and itemized deductions, aka the “read my lips” taxes).
- Keep the Earned Income Tax Credit (EITC) and the Child Tax Credit either in current form or in some revised version.
- Keep the current law for the Standard Deduction and Personal Exemptions. Itemized deductions would be eliminated.
- Tax capital gains and dividends at ordinary income rates.
- Create a non-refundable 12% credit, available to all taxpayers, for mortgage interest on up to $500,000 of debt on a primary personal residence. There would be no tax benefit for interest paid on home equity loans or second residences.
- Create a similar, and also non-refundable, 12% credit for all taxpayers for charitable giving in excess of 2% of the taxpayer’s Adjusted Gross Income.
- Continue to exclude from income the cost of employer-provided health insurance premiums, eventually capped at 75% of 2014 premium levels.
- Tax the interest on newly issued state and municipal bonds, which are currently exempt from taxation.
- Consolidate the current menu of retirement accounts into one plan that limits “tax-preferred” contributions to the lesser of $20,000 or 20% of income.
- Expand the Saver’s Credit.
All other “tax expenditures” (i.e. deductions and credits) would be eliminated under the proposal. The restructured tax rates would save $80 billion by 2015 and $180 billion by 2020, the report claims.
To make sure that Congress moves quickly to pass comprehensive tax reform legislation, “the Commission recommends enacting a ‘failsafe’ that will automatically trigger should Congress and the Administration not succeed in enacting legislation by 2013 that meets specified revenue targets”. So if Congress does nothing by a certain date, the failsafe would impose across-the-board reductions in deductions and credits.
While it’s hard to predict how much potential the scheme has of becoming law, it at least provides a good starting point for a much-needed serious discussion of tax reform. As the report’s title implies, we are at a moment of truth indeed.
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