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William Perez

Fiscal Responsibility Commission Proposes Three Tax Reform Ideas

By November 15, 2010

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On November 10, 2010, the National Commission on Fiscal Responsibility and Reform issued a draft report containing recommendations "designed to balance the budget, excluding interest payments on the debt, by 2015." The report represents the proposals of the commission's co-chairs Senator Alan Simpson and Erskine Bowles. You can download the full version of the draft report (50 pages, PDF).

The report outlines how various changes in taxation and government spending can help reduce the federal debt and ensure the long-term viability of government programs such as Social Security. Of importance to me are the proposals to reform and simplify America's tax laws.

Simpson and Bowles outlined three possible tax reform scenarios for our nation's leaders to seriously consider. Their goals were to lower tax rates, simply the tax system, broaden the tax base, reduce the amount of government spending through so-called tax expenditures, make it easier for people to comply with the tax law, make America the best place to start and run and business, and reduce the federal deficit.

The first scenario Simpson and Bowles put forward is called the Zero Plan. The Zero Plan proposes to consolidate the existing six tax brackets (ranging from 10% to 35%)into three brackets of 8%, 14%, and 23%. These tax rate reductions are made possible by eliminating all tax expenditures -- which is a broad term that encompasses all deductions and credits. The Zero Plan would make tax filing much simpler, since individual taxpayers would no longer need to keep track of their deductions. This plan would also eliminate the alternative minimum tax and the limitations placed on itemized deductions and personal exemptions. The Zero Plan would also eliminate the preferential tax rate for long-term capital gains and qualified dividends.

The second tax reform scenario the National Commission on Fiscal Responsibility and Reform advanced is called Wyden-Gregg Style Reform. These proposals are modeled on a tax bill introduced in February 2010 by Senators Ron Wyden and Judd Gregg. This proposal would replace our existing six tax brackets with three rates of 15%, 25%, and 35%. The standard deduction would increase to $15,000 for unmarried people and $30,000 for married filers. The deductions for state and local taxes and miscellaneous itemized deductions would be eliminated, as would the tax-free fringe benefits through cafeteria plans. Mortgage interest deductions would be limited to exclude interest on a second home, interest on home equity loans, and for mortgages over $500,000. Charitable deductions would be limited to the amount in excess of 2% of a person's adjusted gross income, and the tax-free portion of employer-provided health insurance would be limited.

The third tax reform scenario discussed by the Commission is the Tax Reform Trigger. This plan would limit itemized deduction, the tax-free exclusion of health insurance, and general business credits if more broad-based tax reform is not enacted by the end of 2012. Itemized deductions and health insurance benefits would need to be reduced by around 85% by 2015 to reduce the federal deficit by $80 billion in 2015. The Tax Reform Trigger plan would continue to reduce the tax-deductible portion of these deductions each year until more comprehensive tax reform is legislated.

Earlier in 2010, a separate presidential tax reform commission urged national leaders to reform and simplify the tax system.

More news about the National Commission on Fiscal Responsibility and Reform's proposals:

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