Deficit Commission Draft Proposal Released

The co-chairmen of the National Commission on Fiscal Responsibility and Reform released their draft proposal on November 10, 2010.  The Commission was established by Pres. Obama on February 18, 2010 and is to provide recommendations for reducing the national budget deficit by December 1, 2010.  The draft proposal has brought fierce reactions from politicians and others seeking to protect their personal interests in government benefits.  In my opinion, if our politicians are unwilling to responsibly lead, and if the public is unwilling to make sacrifices, the country's financial mess will produce consequences that will be more severe than the steps needed to fix the mess.

The draft proposal suggests a variety of spending cuts and tax increases, organized into three options.  Some of the proposals are:

OPTION 1:  THE ZERO PLAN

• Eliminate income tax deductions worth $1.1 trillion of tax savings.  The Commission terms this as eliminating "tax expenditures," which is political-speak for deductions.  Only a politician can think that legitimate tax deductions are a form of government spending.
• Lower the top individual income tax rate to 23% and the corporate tax rate to 26% once deductions have been eliminated.  This is called "broadening the base."  Then, as certain deductions are deemed desirable, correspondingly increase the tax rates.  We saw this before under Pres. Reagan as part of the Tax Reform Act of 1986.  Deductions were eliminated and the tax rates lowered.  Of course, once more income became taxable, Congress later increased the tax rates.
• Eliminate the alternative minimum tax.

OPTION 2:  WYDEN-GREGG STYLE REFORM (named after proposed legislation)

• Repeal the alternative minimum tax.
• Triple the standard deduction to $30,000 ($15,000 for individuals).
• Repeal the deduction for state income taxes, cafeteria plans, and miscellaneous itemized deductions.
• Disallow mortgage interest deductions for mortgages over $500,000.
• Allow charitable deductions only to the extent the amount exceeds 2% of adjusted gross income.
• Establish three individual tax rates of 15%, 25%, and 35%.
• Eliminate depreciation, LIFO, and oil and gas industry incentives for corporations and lower the tax rate to 26%.
• Permanently extend the research credit.

OPTION 3:  TAX REFORM TRIGGER

• Call upon Congress to enact tax reform by 2012.
• If tax reform is not enacted by 2012, then starting in 2013, all deductions and credits would be reduced across the board by 15% to achieve certain deficit reduction goals.
• Increase the percentage haircut over time until tax reform is enacted.  The Commission thinks Congress will be forced to reform taxes by inflicting more pain on the public.

OTHER ITEMS

• Increase the gasoline excise tax by 15 cents per gallon over time.
• Eliminate or limit the income tax exclusion for employer-sponsored health care coverage.
• Gradually increase the Social Security retirement age to 68 by 2050 and to 69 by 2075.  Increase the amount of wages subject to Social Security tax.  The unfortunate fact about Social Security is that the past decades of surplus taxes, which were supposed to constitute a "trust fund," have been spent and have masked the size of previous budget deficits.  Now that the program needs to tap into the "trust fund," nothing is there.  Excess Social Security benefits now have to be funded with additional budget deficits, higher taxes, reduced benefits, or a combination of all three.
• Reduce "discretionary spending" in the budget, including defense and farm subsidies.