Is Federal Tax Reform Even Possible?

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More On the National Commission on Fiscal Responsibility and Reform

By Children’s Home Society of Florida Foundation

In 2010, the National Commission on Fiscal Responsibility and Reform considered possible options for reforming the income tax system. The bipartisan commission was co-chaired by former Senator Alan Simpson and former White House Chief of Staff Erskine Bowles.

Bowles-Simpson

The Bowles-Simpson tax solution involved a substantial reduction in the rates by limiting itemized deductions or converting them to tax credits.

In response to the Simpson-Bowles proposal and those from members of Congress and presidential candidates, the Senate Finance Committee leadership met with the Joint Committee on Taxation (JCT). Committee Chair Max Baucus (D-MT) and ranking member Orrin Hatch (R-UT) requested a study by JCT of various tax reform options.

The JCT experiment discussed options if various tax expenditures were repealed. Based on the JCT analysis, there was only a small reduction in rates possible. However, other commentators noted that the JCT study did not consider all of the base-broadening strategies.

In response to the JCT study, Simpson and Bowles issued a joint statement and noted, “Nothing in the JCT analysis changes our belief that it is possible for tax reform to reduce rates and produce additional revenues if policy makers are willing to make the tough choices to eliminate or scale back tax expenditures.”

The Simpson-Bowles proposal showed a potential to reduce rates to 8%, 14% and 23% if there is a drastic reduction in other tax expenditures. The nonpartisan Committee for a Responsible Federal Budget (CRFB) also responded to the JCT study.

The Committee for a Responsible Federal Budget Responds

The CRFB analysis indicated that the Simpson-Bowles commission strategy could work if there is partial or total elimination of tax expenditures. Another CRFB analysis also indicated that there was a 2005 Treasury study by the President’s Advisory Panel on Tax Reform that claimed a combination of base-broadening and rate reduction is possible.

Assessment

CRFB staff noted, “Although these two analyses differ in some respect, both show that the full elimination of all tax expenditures would allow the top tax rate to fall to 23% while still putting aside more than $1 trillion for deficit reduction.”

Editor’s Note: Your editor and this organization take no specific position on these tax reform strategies. The proposed major rate reduction plans all require significant limits on itemized deductions. Most strategies also tax capital gains at 28%. These changes will be difficult to pass during the major tax reform expected in 2013.

Conclusion

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US Budget Deficits Require Both Spending Cuts and Tax Increases

The CRFB Speaks

By Children’s Home Society of Florida Foundation

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The nonpartisan Committee for a Responsible Federal Budget (CRFB) has published a release on October 20 that discusses some of the options to tackle the federal deficit. According to a Bloomberg News poll, there are two major issues that are foremost in the minds of voters as they go to the polls on November 2nd. The first is jobs and the US economy. The second issue focuses on federal finances and the budget deficit.

CFRB Suggestions

The CFRB suggests that there are four potential options for reducing expenditures and one for increasing revenue.

1. Fraud, Waste and Abuse – A favorite comment of all political candidates is that he or she will reduce fraud, waste and abuse. While there may be some savings, this historically has been a fairly modest part of actual deficit reduction.

2. Strengthen Social Security – Congress will need to address methods for strengthening Social Security. The Social Security program used to run a substantial surplus each year. However, in 2010 the federal deficit will total approximately $40 billion. That is, the amounts received by Social Security will be $40 billion lower than the amounts distributed for benefits.

Social Security

By 2020, Social Security could be running a $100 billion deficit. Social Security Trustees have stated, “The projected trust fund shortfalls should be addressed in a timely way so that necessary changes can be phased in gradually and workers can be given time to plan for them.”

3. Healthcare – The Congressional Budget Office notes that the current healthcare programs could require nearly one-half of the federal budget by 2030 or 2040. Therefore, there will need to be further changes in healthcare in order to make the program fiscally sustainable.

4. Defense – Defense expenditures in 2010 were 4.7% of Gross Domestic Product (GDP). This amounted to $692 billion. Defense Secretary Gates has acknowledged that there may be opportunities to eliminate some weapons systems and reduce expenditures.

5. Increased Taxes – The CFRB release states, “It is very difficult to lay out a credible deficit plan that would not increase taxes. It is also very difficult to develop a comprehensive plan that would not raise taxes on families making less than $250,000 per year.” The potential for increased taxes has focused on income taxes, capital gains taxes, estate taxes and a consumption tax such as a gas tax or a value added tax.

Assessment

The Fiscal Commission appointed by President Obama is expected to issue a report in December that discusses these issues.

Editor’s Note: Your editor and this organization take no position with respect to the many financial and tax options that are available to Congress. This information is offered as a public service to our readers.

Conclusion

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