Nearly $1 Trillion Net Tax Hike Proposed in Fiscal Commission’s ‘Tax Reform’ Plan

November 12, 2010 - 6:00 AM


Cash, money, dollars

U.S. currency. (AP File Photo/J. Scott Applewhite)

(CNSNews.com) – Over the next 10 years, Americans could see a net federal tax hike of $961 billion if the draft recommendations of the National Commission on Fiscal Responsibility and Reform are enacted. This proposed tax hike would include those earning below $250,000, the people that President Barack Obama has repeatedly pledged would not see a tax hike.

The draft of the National Commission’s report from co-chairmen Erskine Bowles, a Democrat, and Alan Simpson, a Republican, talks about “lower rates” and “comprehensive tax reform.” But the lower rates in question do not offset the tax deductions and tax credits that are eliminated under the plan. Thus there would be a net tax increase.

The report projects $751 billion in revenue from changes to the tax code and another $210 billion from “other revenue.”

The hikes would encompass increased gasoline taxes, a change in the tax brackets and an automatic tax hike when the budget is not balanced. Along with significant spending cuts in the Defense Department, government personnel, eliminating congressional earmarks, and raising the age for collecting Social Security, the commission’s draft proposal is supposed to reduce the federal deficit by $4 trillion in 2020.

“Getting rid of most deductions and credits and replacing it with lower tax rates would mean virtually anyone paying taxes would be affected,” Ryan Ellis,  a tax policy analyst for Americans for Tax Reform, told CNSNews.com. “It’s a good thing if they were being replaced with rates low enough to make up the difference, but they are not. The fact that their own report says that it raises net taxes by $1 trillion over 10 years means that they are not lowering rates enough.”

The draft calls for hiking the gas tax 15 cents by 2013 and dedicating the funding to transportation. The report also says, “Include automatic stabilizer with future benefit and/or revenue changes,” which would likely mean an automatic tax increase if the budget is unbalanced.

The report provides three options for restructuring the tax system, with common goals of lowering rates, simplifying the code, broadening the base, cutting tax expenditures, improving compliance, making America more competitive and reducing the deficit.

All of the proposals would eliminate the Alternative Minimum Tax, a tax law passed in 1969 designed to hit high-income earners that might avoid taxes through various shelters.

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The first option, referred to as “The Zero Plan,” would “consolidate the tax code into three individual rates” that could be reduced if exemptions are repealed. But any additional tax deductions approved by Congress would force them to vote for an automatic increase in the one or more tax rates.

“Add back in any desired tax expenditures, and pay for them by increasing one or all of the rates from zero-expenditures low,” the draft says.

The second option is the tax reform proposal supported by Sens. Ron Wyden (D-Ore.) and Judd Gregg (R- N.H.). This plan would establish three rates: 15 percent, 25 percent and 35 percent. It would limit the mortgage deduction to exclude a second home and limit charitable deductions with a floor at 2 percent of the annual gross income, and it would cap income tax exclusions.

“It is critical to our nation’s future that we take action that puts the country and our children’s future back on sound financial ground,” Gregg said in a statement. “This will not be the final proposal, but it is a significant step down the path of establishing fiscal responsibility.”

The third option in the draft is a “Tax Reform Trigger.” It calls on Congress to pass legislation agreeing that a definitive tax reform package be in place by the end of 2012, or else it would mean automatic cuts to deductions for health exclusions and business credits in 2013.

Still, none of these ideas present a net tax cut, Ellis said.

“It’s not tax reform if it’s a net tax hike,” Ellis said. “If you’re going to do tax reform, there’s three pieces to tax reform. You want to broaden the base, which they do. You want to lower the tax rates, which they do. The third and most important part is you have to do it in such a way that it’s not a net tax hike. You have to lower the rates at least as much as you’re broadening the base, otherwise it’s not tax reform. It’s a tax increase that makes the code a little simpler.”

The 18-member commission includes members appointed by President Barack Obama and members from each party in the House and Senate leadership. A final report is due on Dec. 1 and must have the approval of 14 of the 18 members on the commission.

That could be tough, as the draft has generated criticism from the right and the left.

Commissioner member Rep. Jan Schakowsky (D-Ill.) attacked the plan for raising the retirement age on Social Security and increasing out-of-pocket costs for seniors in Medicare by 2050.

“The gap between the rich and the middle class has never been greater in our country,” Schakowsky said in a statement. “These proposals will only make the situation worse.”

President Barack Obama

President Barack Obama meeting with his staff and Cabinet members in the Cabinet Room of the White House in Washington, Thursday, Nov. 4, 2010. (AP Photo/Charles Dharapak)

Commission member Sen. Tom Coburn (R-Okla.) said he has to think closely about some of the proposals and expects special interest groups to attack the plan. But, he added that tough action is absolutely necessary.

“The American people will no doubt have a healthy and robust debate about these options, as they should,” Coburn said. “However, I would encourage taxpayers to view with great suspicion the beltway, interest group culture that often prefers demagoguery over honest debate. In the real world, no family facing tough economic times has the luxury of treating portions of their budget as sacrosanct. Neither should Congress.”