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William Perez

Tax Reform Proposal from the Bipartisan Policy Center

By July 10, 2012

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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."

Source: Testimony of Domenici and Rivlin, pages 14 and 15, given at the hearing on Confronting The Looming Fiscal Crisis, before the Senate Finance Committee.

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?

Comments
July 10, 2012 at 1:39 pm
(1) Jean Murray says:

How would this plan eliminate the filing of tax returns? Would it be just a calculation?

July 10, 2012 at 1:47 pm
(2) Ken Huffman says:

Simplifying the tax digest is a great idea whose time has come, as it has several times over the past few hundred years. Don’t look for it to happen. Every attempt to “simplify” the tax code has encouraged ever more loopholes. Congress needs to eliminate the current code with an entirely new code, because the current code has a vast number of triggers that create a multitude of unintended consequences whenever a ligitimate change meets an old provision. I especially disagree with the proposal to tax Social Security at 100%. That is the most blatant abuse of our senior citizens, since contributions are fully taxed before they are taken out of our paychecks, and then to have it fully taxed again hurts the most vulnerable for a second or even third time. Shame!

July 10, 2012 at 2:28 pm
(3) Charles Gugins says:

Seems taxing 100% of social security benefits is going to hit senior citizens hard. Seems as though this tax is unfair to that particular group of which I will become a part of soon.

July 10, 2012 at 4:11 pm
(4) whateveronu says:

Social Security should never be taxed at more than 50%. That is the amount that has already been pre-taxed. That is double taxation.

July 10, 2012 at 5:00 pm
(5) Lewis Hart says:

I have already paid taxis for the money I get in Social Security benefits. Why should I have to pay any taxes on my Social Security benefits? That is directed at the seniors hwo can least afford more taxes.

July 11, 2012 at 10:03 pm
(6) Josie says:

Why the $1000 capital gains exclusion? And this might be more complicated than the initial 15/28% rate. If not it boosts my taxes by 33%

July 11, 2012 at 10:07 pm
(7) jason says:

I don’t see the basic fairness in this scenario other than the tax rates are uniform. How does this achieve fairness for families, singles, the elderly? The EITC is not terribly hard to understand. The underlying policies served by the tax code are less understandable. Many credits and exemptions promote societal goals.

July 12, 2012 at 3:08 pm
(8) TOM says:

HOW WOULD IT ELIMINATE FILING A RETURN???

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