President Obama’s newly formed 18-member bipartisan National Commission on Fiscal Responsibility and Reform (Commission) proposed tax measures on November 10 2010 to reduce the federal budget deficit by $3.8 trillion in nine years. Through spending cuts and tax increases, co-chairs of the Commission, former White House chief of staff during the Clinton administration, Erskine Bowles and former Senator Alan Simpson aim to alleviate the deficit concerns that plague the US.
“The options are variations on the traditional-broaden-the-base-and-lower-the-rates kinds of proposals. They are, however, more aggressive in pursuit of these twin goals than customarily seen,” said Clint Stretch, Deloitte Washington DC managing principal of tax policy. They are “much more [aggressive] by way of eliminating benefits and deeper rate cuts,” Stretch added.
“The proposals borrow in part from a range of ideas that have been proposed in the past, including President Bush's 2005 tax reform panel, legislation introduced by Senators Wyden and Gregg, and other proposals,” said Drew Lyon, principal in the Washington DC national tax services group of PwC.
It is uncertain if the supermajority of the Commission needed to pass the proposal onto Congress will be secured next month. To reach a supermajority, 14 of the 18 members must approve the proposals. Though the final approval and recommendation to Congress was initially to be released on December 1, some US tax practitioners predict a delay.
Although Lyon said that there has been no official word that the December 1 deadline will be missed, initial deadlines of this nature have been frequently missed in the past.
Members of the bipartisan Commission who are now serving in Congress include Senate Finance Committee Chairman Max Baucus, Representative Paul Ryan, who is said to become the Chairman of the House Budget Committee in 2011 and Representative Dave Camp, who is expected to become the Chairman of the House Ways and Means Committee next year.
President Obama created the Commission with the hope of harmonising the federal budget deficit by 2015, and to generally create renewed optimism about where the US economy is heading.
The 50-page slide presented by the Committee titled “Co-Chairs’ Proposal” contains an outline on the proposed comprehensive tax reform. In addition to lowering rates, simplifying the code, broadening the base, cutting spending in the tax code, improving compliance and reducing the deficit, the Committee also includes ensuring “America [is] the best place in the world to start and grow a business,” as a chief goal.
Following these goals, three options are presented: the Zero Plan, Wyden-Gregg style reform and tax reform trigger. While most aspects associated with each plan are widely accepted and not innovative, the proposal has nonetheless sparked debate. Each option is expected to save $80 billion annually.
The Zero Plan
Under the Zero Plan, the tax code would be consolidated into three individual rates and one corporate rate.
All $1.1 trillion of tax expenditures would be eliminated. Savings as a result would then be allocated to reduce individual and corporate income tax rates. Remaining savings would be used to reduce marginal tax rates.
“This is a plan to eliminate all or virtually all tax expenditure,” said Stretch.
Depending on how many tax expenditures would be repealed, individual and corporate income tax rates could increase and decrease accordingly. Retention equates to higher rates for both individual and corporate income tax rates, while repeal would lead to a decrease for both rates.
Capital gains and dividends would be categorised and taxed as ordinary income under the Zero Plan.
Wyden-Gregg style reform
Option two is based on legislation introduced by Senator Ron Wyden and Senator Judd Gregg.
The Wyden-Gregg style reform would establish three individual tax rates of 15, 25 and 35%.
It would also reduce the corporate tax rate to 26%, eliminate last in first out accounting, the section 199 deduction and oil and gas preferences, and make the research and experimentation credit permanent. Other modifications to business tax expenditures would occur. Internationally, changes would include a territorial tax system.
“The Fiscal Commission demonstrates what Senator Gregg and I have spent the last year saying,” said Senator Wyden said in a November 10 press release. “By eliminating what amounts to tax earmarks for special interests, it is possible to simplify the tax code, promote economic growth and cut taxes for the vast majority of American families and businesses.”
Wyden also commented that the Commission’s adaptation of the Wyden-Gregg style reform did not entirely encompass what he has truly proposed.
“For corporations, the potential for a 26 percent corporate tax rate is alluring, but the cost comes in terms of higher taxes through the loss of other provisions,” said Lyon.
A portion of savings would be dedicated to deficit reduction.
Tax reform trigger
The tax reform trigger plan modifies which parties are responsible for accomplishing these ambitious goals. The Senate Finance Committee, House Ways and Means Committee, and Treasury Department would be largely responsible for developing and enacting comprehensive tax reform by the end of 2012.
To expedite action, a so-called across-the-board haircut on itemised deductions and general business credits would apply if comprehensive tax reform failed to be enacted by the end of 2012. The haircut would begin in 2013 and grow until adequate tax reform was fully carried out. The co-chairs estimate that a 15% haircut would be necessary to meet deficit targets by 2015, Lyon said.
Future steps
It was announced that President Obama will not comment on the proposal until the commission completes its work.
The spending and tax proposals are bold, comprehensive and controversial. “They show the extent to which deductions and credits would have to be eliminated or scaled back in order to achieve significant rate reduction in a revenue neutral manner,” said Lyon.
“The most positive aspect of the plans is that it demonstrates how difficult it will be to significantly reduce the deficit through either spending cuts or tax increases,” Stretch said.
At the very least, the newly founded Commission has opened up the floor for debate. Whether or not the Commission will reach a conclusion during the upcoming lame duck session remains to be seen.
