Monday, November 22, 2010

ANOTHER DEFICIT REDUCTION REPORT

On the heels of the discussion draft issued by the co-chairmen of President Obama's National Commission on Fiscal Responsibility and Reform, the Bipartisan Policy Center’s Debt Reduction Task Force has issued “Restoring America’s Future” (click here for the full report or here for the Executive Summary), another comprehensive plan to solve debt crisis, create jobs, simplify taxes, and fix Social Security.

The Bipartisan Policy Center (BPC) is a non-profit organization that was established in 2007 by former Senate Majority Leaders Howard Baker, Tom Daschle, Bob Dole and George Mitchell to develop and promote solutions that can attract public support and political momentum in order to achieve real progress.

For purposes of this post I am only interested in the proposals for tax reform – and I look at the proposals from the point of view of making the Tax Code simpler and more fair.

In the introduction to the “Create a Simple, Pro-Growth Tax System” section the report discusses our current tax system –

The system is so complex that most taxpayers – even those with low incomes – now use either a professional tax preparer or tax software. The alternative minimum tax (AMT), initially designed to ensure that all high-income taxpayers paid some income tax, has become the poster child for the tax system’s failure, requiring Congress to enact annual and increasingly expensive temporary patches to prevent the AMT from ensnaring millions of middle class households (especially those with children) in a web of pointless complexity, high tax rates, and unfairness.”

The report proposes “a radically simplified income tax that will lower tax rates, broaden the base, and eliminate the need for millions of households to file tax returns”.

The proposals include –

* Replace the current graduated brackets of from 10% to 35% with two individual tax rates – 15% and 27%.

* Eliminate the Standard Deduction and all itemized deductions.

* Create a 15% credit for home mortgage interest on a principal residence of up to $25,000 and a 15% credit for charitable contributions, both “refundable”.

* Replace the personal exemption for children, Child Tax Credit, Earned Income Credit, Head of Household filing status, and Child and Dependent Care Credit with a universal credit of $1,600 per child, indexed to changes in the Consumer Price Index (CPI), and an earnings credit of 21.3% of the first $20,300 of earnings for each worker in the “tax unit” (I assume each spouse), also indexed to the CPI. If I read the report right I do believe the excess credits will be refundable in some manner.

*Eliminate or scale back all other “tax expenditures”.

* Limit combined individual and employer contributions to qualified retirement plans to 20% of annual earnings up to a maximum of $20,000 per year, indexed for inflation.

* Create a refundable savings credit for taxpayers in the 15% bracket.

* Eliminate the preferential rates on capital gains and dividends.

The two allowable credits discussed above, for mortgage interest and contributions, will not be provided to the taxpayer, but will go directly to the institutions. Mortgage lenders will apply for a tax credit, which will be passed through to homeowners as a 15% reduction in their home mortgage interest payments, and qualifying charities will apply to the IRS for a “matching grant” to supplement taxpayer contributions “so that for every $85 the taxpayer gives, the charity will receive another $15”.

The report also outlines curious rules so that the child credit discussed above is “automatic” and does not have to be requested each year.

The Task Force also calls for –

*A new “modest” 6.5% national Debt Reduction Sales Tax (DRST) to be phased-in over 2 years, and

* A temporary Social Security “payroll tax holiday” for all of 2011 that “excuses” employers and employees from paying the 12.4% Social Security tax (and presumable the appropriate portion of the “self-employment tax”). According to the report “the tax holiday will not impact the solvency of the {Social Security} Trust Funds, which will be reimbursed in full from general revenues at the same time that they would have received payments in the absence of the holiday”. The report suggests this will create between 2.5 and 7 Million new jobs.

While there is much worth discussing in the report I must continue to voice my strong opposition to any kind of “refundable credit” paid via a tax return.

I do somewhat like the concept of providing the benefit for mortgage interest via a reduction in the actual mortgage payment (much like I would have the benefit for education expenses provided via direct tuition grant), and am not totally against a “matching grant” approach to charitable contributions, and agree that they are worth looking into.

However the mechanics of it all is somewhat confusing. Would all mortgage holders apply for and receive a 15% federal “grant” for all first mortgages issued? How would it work with mortgages given or “taken back” by individual? And what about refinancing? Much of the “methodology” of the benefits provided in the report raise all kinds of “how to” questions.

Of the various proposals in the two reports I still think I would prefer to use the “zero base” option of BO’s Commission chairman as a starting point. I would initially eliminate all “tax expenditures” and add back to the Tax Code only those deductions that are absolutely appropriate - some kind of higher Standard Deduction, a higher personal exemption for dependents, and tax benefits for state income and real estate taxes, acquisition debt mortgage interest, charitable contributions, and perhaps employee business expenses. And I would provide any benefits for higher education, employment encouragement (EIC) and other items as direct payments or supplemental welfare checks (as discussed in Friday’s post).

So what do you think of this new report?

TTFN

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