Want a vacation from paying taxes? BPC takes on the deficit.

The Bipartisan Policy Commission has released a tax reform plan that slashes spending and reinvents tax policy: starting with a year-long payroll tax holiday.

By , Guest blogger

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    Former Sen. Pete Domenici, R-MN, explains a graph showing the increase of debt held by the public at the Bipartisan Policy Center (BPC) on Jan. 25. On Nov. 17, the BPC released its proposal to reduce the deficit by cutting spending and reinventing the tax code.
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Another day. Another bold and controversial tax reform plan. This is getting very interesting.

Today, the privately-funded Bipartisan Policy Center (BPC) released its own far-reaching fiscal proposal. Like the plan offered last week by Erskine Bowles and Alan Simpson, the co-chairs of President Obama’s Deficit Commission, this heavyweight task force aims to both slash the deficit and dramatically reform the Tax Code. The 19-member BPC group was chaired by former Republican Senate Budget Committee Chair Pete Domenici and Alice Rivlin, who has served as vice-chair of the Federal Reserve, founding director of the Congressional Budget Office, and director of the Office of Management and Budget in the Clinton Administration.

I’ll leave it to others to analyze its spending proposals. On the tax side, the BPC plan is at least as sweeping as Bowles and Simpson-- who were themselves exceedingly ambitious.

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Recognizing the continued slow economic recovery, this deficit reduction plan actually starts with a tax cut—a 2011 payroll tax holiday. The fun starts after that. The BPC would eliminate nearly all itemized deductions and kill or scale back most other targeted tax breaks. Among the ideas: It would restructure credits for low-income households by repealing the earned income credit and the child credit, while replacing them with a new child credit and a separate earnings credit. It would gradually eliminate the exclusion for employer-sponsored health insurance. And it would tax capital gains and dividends as ordinary income, except for a very modest exclusion ($1,000 for couples) for long-term gains.

The plan would create a new 15 percent refundable tax credit for charitable gifts and replace the mortgage deduction with a 15 percent refundable credit for up to $25,000 in interest. People could still contribute to tax-advantaged retirement savings accounts, but workers and their employers could only kick in an annual combined maximum of $20,000.

At the same time, the plan would eliminate the Alternative Minimum Tax and create a two-rate tax structure--15 percent for taxable income up to $50,000 ($100,000 for couples), and 27 percent for income above that level. Brackets would be indexed for inflation. Households would also receive a refundable credit of $1,600 for each dependent and a non-refundable credit for those 65 or older. The corporate tax rate would be cut from 35 percent to 27 percent.

As if those changes were not enough, the plan would also phase-in a new broad-based 6.5 percent Value Added Tax, called a Debt Reduction Sales Tax. To help make the tax less regressive, the BPC would create a refundable credit for the first $20,300 of earnings. Still, an add-on VAT will be hugely controversial.

Taken as a whole, these tax changes would generate an additional $2.3 trillion from 2012-2020 and $10.2 trillion from 2012-2030.

The Tax Policy Center has modeled the distributional effects of the plan, just as we did for the Bowles-Simpson proposal. However, while TPC looked at the effects of Bowles-Simpson for 2015, we looked at this one in 2022 (to get past its many phase-ins and outs).

As measured against current policy--that is the 2001 and 2003 Bush-era tax cuts are made permanent, middle-class taxpayers continue to be protected from the AMT and the estate tax reverts to 2009 law—the plan does not change after-tax income for the lowest 20 percent of earners. It would result in a progressive tax increase for everyone else, with after-tax incomes cut by an average of 2.8 percent or about $1,500 for those in the middle 20 percent of earners (who will make an average of about $64,000 in 2018), and 7.2 percent or $19,000 for the top 20 percent (who will make an average of about $350,000).

The top 1 percent of earners—those making about 2.3 million annually-- would see their incomes cut by $130,000 or 8.4 percent while the after-tax income of the top 0.1 percent--who will make an average of nearly $10 million-a-year--would be cut by 11 percent or more than $700,000.

Btw, the pattern is pretty much the same if you want to compare the BPC plan to current law—that is, if you assume that the Bush-era tax cuts all expire, the AMT hits 25 million more middle-class households etc. By that measure, the lowest earning 20 percent get a tax cut of about $100 while everyone else gets a tax hike on average, although a more modest one than if the Bush tax cuts had been allowed to expire extended.

Keep in mind these projections are somewhat different than the distributional analysis published in the BPC report. That’s because BPC used yet another baseline—an alternative policy measure developed by CBO. Since each is merely a guess about where fiscal policy is headed until we do major reform, pick any baseline you want. Then take two aspirin and call me in the morning.

It goes without saying that this plan ventures far out of the usual policy box. And it is worth noting that while the Bowles-Simpson plan was the consensus of two, the BPC task force represented an actual deal forged among 19 political, policy, business, and labor officials who I’d describe as ranging between center-left and center-right in the ideology. The group was somewhat over-represented by Washington budget wonks, and perhaps that it an indication of just how far even those Inside-the-Beltway policy types are willing to go to confront the current fiscal mess. Now, let’s wait to see what the politicians do about it.

Full disclosure: Both current TPC director Donald Marron and former director Len Burman served on the task force. In addition, TPC provided technical assistance to the panel. I was not involved in any of this work.

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