Daily Tax Update - March 15, 2011: Senate Budget Committee Holds Hearing on Report of the Bipartisan Policy Center's Debt Reduction Task Force

SENATE BUDGET COMMITTEE HOLDS HEARING ON REPORT OF THE BIPARTISAN POLICY CENTER’S DEBT REDUCTION TASK FORCE:  Today, former Senator Pete Domenici and Dr. Alice Rivlin, Co-Chairs of the Bipartisan Policy Center's Debt Reduction Task Force, testified on the Bipartisan Policy Center's final report on debt reduction.  With respect to the tax recommendations of the Debt Reduction Task Force, Domenici and Rivlin argued that their plan would be more progressive than the current system as well as more growth-oriented, with a reduction in the corporate tax rate and the use of a consumption tax, rather than an income tax, to raise revenue.

  • The Bipartisan Policy Center is a non-profit organization founded by former Senate Majority Leaders Howard Baker, Tom Daschle, Bob Dole, and George Mitchell "to develop and promote solutions that draw support from both Republicans and Democrats and generate the necessary political momentum to achieve real progress."
  • Domenici and Rivlin stated, "We believe that America is facing two huge challenges that can only be surmounted if both political parties work together:  recovery from the recession and restraining the soaring federal debt.  We also believe that these two challenges must be addressed simultaneously.  The federal budget is on a dangerous, unsustainable path.  Even after the economy recovers from this deep recession, federal spending is projected to rise substantially faster than revenues and the government will be forced to borrow ever-increasing amounts.  Without policy changes, federal debt will rise to unmanageable levels, which will push interest rates up, endanger our prosperity, and make us increasingly vulnerable to the dictates of our creditors, including nations whose interests may differ from ours.  This alarming prospect was created by the actions of both political parties over many years, with strong public approval.  Promises to provide benefits and services through Medicare, Medicaid, Social Security and many other spending programs, as well as reductions in taxes, were extremely popular and both parties took credit for them.  But now, with an aging population and increasingly expensive health care, federal spending will rise much faster than revenues if those popular policies are not changed.  However, the actions needed to reduce the growth of national debt and bring deficits back to manageable levels are all unpopular.  Neither party can take the required actions alone without suffering adverse political consequences.  The only hope is for the two parties to come together around a bipartisan plan – which liberals, moderates, and conservatives alike see as fair – and work together to make it a reality."
  • Their statement continued, "We face two huge challenges simultaneously.  First, we must recover from the deep recession that has thrown millions out of work, slashed home values, and closed businesses across the country.  Second, we must take immediate steps to reduce the unsustainable debt that will be driven by the aging of the population, the rapid growth of health care costs, exploding interest costs, and the failure of policymakers to limit and prioritize spending.  These two challenges must be addressed at the same time, not sequentially.  We need immediate action to sustain the recovery and create jobs, but we cannot delay putting in place measures that will restrain the buildup of debt.  If we do not control the debt, the recovery will not be sustainable.  With current policies in place, even when we recover from the recession, the debt will grow far larger than the economy itself, forcing the nation to borrow enormous and unprecedented sums of money, increasing our dependence on China and other foreign lenders, diminishing our living standards, raising risks of an economic crisis, and reducing America to a second-rate power...That’s why we face a fundamental choice:  We can close our eyes, keep avoiding the problem, and generate more debt that will threaten our economy, mortgage our children’s future, and diminish our leadership around the world.  Or, we can choose a new course – one that can revive our economy, create new and better jobs, restore our financial independence, and ensure that America remains the world’s preeminent economic, military, and political power.  The Task Force report, 'Restoring America’s Future,' is a plan for that new course that we believe would meet both the short- and the longer-run challenges simultaneously."
  • The statement added, "The Bipartisan Policy Center (BPC) Tax Reform Plan represents a radical simplification of the current tax code.  In fact, to best explain it, forget what you know about the complexities of the current tax system, and start fresh.  Outlined below are the core elements of the plan:
    • A two-bracket income tax with rates of 15 percent and 27 percent.  Because there is no standard deduction or personal exemptions, the 15 percent rate applies to the 1st dollar of income.
    • The corporate tax rate would be set at 27 percent, instead of the current 35 percent level.
    • Capital gains and dividends would be taxed as ordinary income (with a top rate of 27 percent), excluding the first $1,000 of realized net capital gains (or losses).
    • Introduce a 6.5 percent broad-based Debt Reduction Sales Tax (DRST), phased-in over two years.
    • To replace the overly complex Earned Income Tax Credit (EITC) and to help offset the effects of the DRST and elimination of personal exemptions, the standard deduction and the child credit, the BPC Plan would establish:
      • A flat refundable per child tax credit of $1,600 (higher than current law); and
      • A refundable earnings credit similar to the current Making Work Pay credit, but substantially higher.
    • Instead of the current system of itemized deductions, which disproportionately subsidizes the housing consumption and charitable giving of upper-income taxpayers, the BPC Plan would:
      • Provide a flat 15 percent refundable tax credit for charitable contributions and for up to $25,000 per year, not indexed, mortgage interest on a primary residence.
      • Eliminate the deduction for state and local taxes.
      • Provide a flat, 15 percent refundable tax credit or a deduction (for those in the higher bracket) for contributions to retirement saving accounts up to 20 percent of earnings or a maximum of $20,000.
      • Include 100 percent of Social Security benefits in taxable income, but:
        • Create a non-refundable credit for Social Security beneficiaries equal to 15 percent of the current standard deduction; and
        • Create a non-refundable credit equal to 15 percent of an individual’s Social Security benefits.
      • Allow deduction of medical expenses in excess of 10 percent of Adjusted Gross Income (AGI) (as in current law).
      • Allow deduction of miscellaneous itemized deductions in excess of 5 percent of AGI.
    • The BPC Plan achieves a massive simplification of the tax code:
      • Aligns the top individual, capital gains and dividend tax rates.
      • Reduces the corporate tax rate.
      • Eliminates the AMT.
      • Eliminates the need to file returns for most individuals.
      • Despite a low top rate of 27 percent, the new tax system created under the BPC Plan is more progressive than the current system and raises the requisite revenue to achieve our debt-reduction goal.
  • The final report can be accessed here.
  • For additional information, contact Philip R. West at pwest@steptoe.com.

BAUCUS AND CAMP TASK JOINT COMMITTEE ON TAXATION WITH ADDITIONAL TAX REFORM RESEARCH: Today, during an organizational meeting of the Joint Committee on Taxation, House Ways and Means Committee Chairman Dave Camp and Senate Finance Committee Chairman Max Baucus, instructed the Joint Committee to continue its work on tax reform and undertake specific research that will help advance the ability of the Congress to enact comprehensive tax reform that will lower tax rates and broaden the base, reduce complexity, and promote job creation. The studies are expected to include an examination of debt financing versus equity financing in the tax code and the taxation of financial products.

  • Camp said, "There is no doubt that today’s tax code is too complex, too costly and takes too much time to comply with.  Add to that the unpleasant reality that America will soon have the highest corporate tax rate in the world, and it is no wonder that the current economic recovery has been far more muted than in past recoveries.  But to assume that corporate reform alone will provide the spark necessary to jumpstart our economy would be a mistake.  Congress must take a comprehensive approach to tax reform so that we address the needs of all job creators – big and small.  I look forward to using this additional research to identify the pathways to the tax policies that promote the job creation our country needs."
  • Baucus said, "Our tax code should maximize job creation and widespread economic growth.  As we work together to simplify the tax code and make it more fair and competitive, we need to be armed with the data showing the impact of potential changes to the code.  This analysis will help us work together to improve our tax code so it helps put Americans back to work and ensures our long-term prosperity."  Baucus also said that the taxation of financial products needs to be "harmonized."

1.  [112nd] H.R.1069: To amend the Internal Revenue Code of 1986 to provide an election for unmarried, nonitemizing individuals to have their returns prepared by the Secretary of the Treasury, and for other purposes.
Sponsor: Rep Cooper, Jim [TN-5] (introduced 3/14/2011)      Cosponsors (None)
Committees: House Ways and Means
Latest Major Action: 3/14/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

2.  [112nd] H.R.1074: To amend the Internal Revenue Code of 1986 to reduce the corporate income tax rate to 10 percent and to lower the rate of tax on capital gains and dividends to 10 percent.
Sponsor: Rep Tipton, Scott [CO-3] (introduced 3/14/2011)      Cosponsors (None)
Committees: House Ways and Means
Latest Major Action: 3/14/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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