US Deficit Panel Lights The Blue Touchpaper

by Mike Godfrey, Tax-News.com, Washington

12 November 2010

A bipartisan panel set up by President Obama to suggest ways in which the US federal deficit and debt can be reduced to sustainable levels has issued wide ranging recommendations on tax and spending, setting the cat among the pigeons in Congress.

The report of the 18 member Commission on Fiscal Responsibility and Reform proposes to simplify the US tax code by reducing the number of tax brackets and lowering rates while repealing special interest tax breaks, broadening the tax base and improving tax compliance.

One tax reform option proposed by the Commission is to consolidate the tax code into three individual rates (8%, 14% and 23%) and one corporate rate (26%) and eliminate the alternative minimum tax (AMT). It would also eliminate all USD1.1 trillion in special interest tax breaks and use a portion of the savings to reduce the federal deficit, the other portion being used to lower marginal income tax rates.

Another tax reform option, inspired by proposals from Senators Ron Wyden (D- Oregon) and Judd Gregg (R - New Hampshire), would also repeal the AMT and establish three individual tax rates at 15%, 25% and 35%. This plan would triple the standard deduction to USD30,000 (USD15,000 for individuals), repeal the state and local tax deduction, and miscellaneous itemized deductions, and limit the mortgage deduction to exclude second residences, home equity loans, and mortgages over USD500,000, among other proposals.

On business taxation, the Wyden-Gregg plan would reduce the corporate tax rate to 26%, permanently extend the research and development tax credit, and eliminate and modify several business tax breaks, such as the domestic production deduction and the depreciation rules. Under this option, international tax reforms would would shift the US towards a territorial tax system.

The Commission's third option, known as the 'tax reform trigger' would mandate the tax law committees of Congress to develop and enact comprehensive tax reform by the end of 2012 and put in place an across-the-board “haircut” for itemized deductions and general business credits that would take effect in 2013 if reform is not yet enacted.

However, perhaps the most contentious aspect of the Commission's report is its call for deep cuts in government spending to hold down federal debt growth to USD3.8 trillion by 2020, about half of the USD7.7 trillion increase projected under current plans. The plan also envisages a steep fall in the federal deficit to less than 3% of the US economy from its 2010 level of almost 10%, or USD1.3 trillion. Government spending on defense, health care and social security programs would all be pared back substantially to achieve these goals.

The Commission's proposals are likely to further polarize opinions between Democrats and Republicans about how best to tackle America's fiscal crisis, as evidenced by reaction to the plan from Congressional leaders.

According to Rep. Nancy Pelosi (D - California), Speaker of the House of Representatives, the Commission's recommendations are "simply unacceptable."

"Any viable proposal from the President’s Fiscal Commission must strengthen our economy, but it must do so in a fair way, focusing on how we can effectively promote economic growth," she stated, adding that: "Any final proposal should do what is right for our children and grandchildren’s economic security as well as for our nation’s fiscal security, and it must do what is right for our seniors, who are counting on the bedrock promises of Social Security and Medicare."

While both camps see things that they both like and dislike in the report, it is clear that the Republicans are more open to the idea of using it as a launch pad for a discussion on tax and spending reform.

"This is a provocative proposal, and while we have concerns with some of their specifics, we commend the co-chairs for advancing the debate. We will continue to work toward solutions that help spur economic growth and restrain the explosive growth of government spending," commented Fiscal Commission member Rep. Dave Camp (R-Michigan), along with Paul Ryan (R-Wisconsin), and Jeb Hensarling (R-Texas).

President Obama, meanwhile, is reserving judgment on the Commission's proposals until its final report is published on December 1.

“The President will wait until the bipartisan fiscal commission finishes its work before commenting," said White House spokesperson, Bill Burton. "He respects the challenging task that the co-chairs and the commissioners are undertaking and wants to give them space to work on it. These ideas, however, are only a step in the process towards coming up with a set of recommendations and the President looks forward to reviewing their final product early next month."

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