On June 19, 2012, Dr Alice Rivlin and Senator Pete Domenici testified before the Senate Finance Committee on the topics of debt reduction, tax reform, and federal spending. They presented a set of budget and tax proposals developed by the Bipartisan Policy Center's Debt Reduction Tax Force.
Domenici and Rivlin presented a fundamental tax reform package that is compact and understandable. The BPC's tax reform proposal consists of the following features:
- "A two-bracket income tax with rates of 15% and 28%. Because there is nostandard deduction or personal exemptions, the 15% rate applies to your first dollar of income."
- "The corporate tax rate will be set at 28%, instead of the current 35% level."
- "Capital gains and dividends will be taxed as ordinary income (at the 15% and 28% rates), excluding the first $1,000 of realized net capital gains (or losses)."
- "To replace the overly complex Earned Income Tax Credit (EITC) and to help offset the elimination of personal exemptions, the standard deduction and the childcredit, the BPC Plan will establish:
- "A flat refundable per child tax credit of $1,600 (higher than current law); and
- "A refundable earnings credit similar in structure to the recent Making Work Pay credit, but substantially higher."
- "Instead of the current system of itemized deductions, which disproportionately subsidizes the housing consumption and charitable giving of upper-income taxpayers, the BPC Plan will:
- "Provide a flat 15% refundable tax credit for charitable contributions and for up to $25,000 per year, not indexed, mortgage interest on a primary residence."
- "Eliminate the deduction for state and local taxes."
- "Provide a flat, 15% refundable tax credit or a deduction (for those in the higher bracket) for contributions to retirement saving accounts up to 20% of earnings or a maximum of $20,000.
- "Include 100% of Social Security benefits in taxable income, but:
- "Create a non-refundable credit for Social Security beneficiaries equal to 15% of the current standard deduction; and
- "Create a non-refundable credit equal to 15% of an individual's Social Security benefits."
- "Effective in 2015, cap and then phase out over 10 years the tax exclusion for employer-sponsored health insurance benefits."
- "Allow deduction of medical expenses in excess of 10% of AGI (as in current law)."
- "Allow deduction of miscellaneous itemized deductions in excess of 5% of AGI."
"The BPC Plan achieves a massive simplification of the tax code by aligning the top individual, capital gains and dividend tax rates, significantly reducing the corporate tax rate, and eliminating the AMT. Additionally, most individuals will no longer have to file an annual tax return beyond an initial declaration of status because the most commonly taken deductions have either been turned into refundable credits, determined solely based on the number of children and earnings, or can only be deducted above a substantial floor. Despite a low top rate of 28%, the new tax system created under the BPC Plan will be more progressive than the current system and raise the requisite revenue to achieve our debt-reduction goal."
Overall, the Bipartisan Policy Center's tax reform plan outlined above is similar to the plan they developed in November 2010.
What I like about the Bipartisan Policy Center's tax reform plan. This tax reform plan is capable of being comprehended, and it makes the calculation of tax much simpler. And the tax reform plan is situated with respect to policy goals, namely to reflect progressive taxation and to reduce the federal debt. Of course, it is possible for taxpayers to disagree about the merits of this plan and to debate the worthiness of these two policy goals. For myself I'm not sure if I like various provisions, but I do especially like the part how the Center thinks their tax reform plan would eliminate the need for most people to file an annual tax return. This would prevent administrative problems that people face when dealing with the IRS.
What do you think of the plan? What do you think would make for a good tax reform proposal?