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Lukewarm Response To US Fiscal Commission Report

by Mike Godfrey,, Washington

07 December 2010

The report of the National Commission on Fiscal Responsibility and Reform, which was appointed by President Barack Obama to address the America's increasing fiscal deficit and public debt, has been issued but has received little enthusiastic support for its policy proposals.

President Obama’s welcome to the report was itself lukewarm in that he thanked the members of the Commission for “their important work in highlighting the magnitude of the challenge before us, and outlining an array of options to confront it. The Commission’s report underscores that to sustain growth in the medium- and long-term we need to face some difficult choices to curb runaway debt.”

“The Commission’s majority report includes a number of specific proposals that I – along with my economic team - will study closely in the coming weeks as we develop our budget and our priorities for the coming year,” he added.

Overall, the Commission’s proposals would aim to stabilize public debt by 2014 and reduce it to 60% of gross domestic product (GDP) by 2023 and 40% by 2035, while increasing government revenues to 21% of GDP (from under 15% at present) and getting its expenditure below 22% (from almost 24% currently), and eventually to 21%.

The target would be to reduce the US budget deficit to 2.3% of GDP by 2015. Through both increased tax revenues and reduced public expenditures, the proposals would entail nearly USD4 trillion in deficit reduction through 2020, which the Commission said would be “more than any effort in the nation’s history.”

With regard to its comprehensive tax reforms, the Commission said that “the tax code is rife with inefficiencies, loopholes, incentives, tax earmarks, and baffling complexity. We need to lower tax rates, broaden the base, simplify the tax code, and bring down the deficit. We need to reform the corporate tax system to make America the best place to start and grow a business and create jobs.”

While income tax rates would be sharply reduced to three brackets of 12%, 22% and 28%, from the present six rates of up to 35%, and the alternative minimum tax would be abolished, ‘tax expenditures’, which are backdoor expenditures in the tax code, would be cut. In addition, mortgage interest relief would be capped and all capital gains and interest (together with interest from newly-issued state and municipal bonds which is currently tax-exempt) would be treated as ordinary income.

The Commission has also proposed to reform corporate taxes, by establishing a single corporate tax rate between 23% and 29%. However, general business tax credits and business tax expenditures – currently numbering more than 30 and 75 respectively – would be curtailed.

The report was issued by the Commission’s two co-chairs, Alan Simpson and Erskine Bowles before any vote on the proposals. They were unable to obtain the necessary majority within its members which would have meant that Congress would have had to vote on its proposals. In the end, its members, and subsequently many politicians, were split on various elements of the harsh medicine, in both cutting government expenditure and increasing tax revenues, that the Commission proposed.

TAGS: tax | economics | fiscal policy | corporation tax | tax rates | United States | tax reform | individual income tax

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