June 2011:
Fiscal Commission's "Zero Tax" Plan Scores Points

Washington Watch | June 2011
By Bruce Moyer

A three-way battle is brewing among the White House, Senate Democrats, and House Republicans over raising the nation’s $14.3 trillion debt ceiling by the Aug. 2 deadline set by the Treasury Department.

With the spotlight focused so squarely on federal spending, many policy experts believe an unprecedented opportunity exists to break the partisan logjam that has made it so hard to introduce more equity into the tax system and remove tax expenditures that contribute to the deficit. (“Tax expenditures” is a broad term that encompasses all tax deductions and credits.) The total cost of all tax expenditures in the federal tax code, which amounts to $1.1 trillion a year in spending, causes both deficits and marginal tax rates to be higher than is necessary or optimal for the economy. In fact, the total cost of tax expenditures in 2009 was greater than the revenue raised through individual income taxes.

Whether congressional Democrats and Republicans can agree to eliminate any tax expenditures and if so, which ones, presents a real challenge. Democrats argue that higher tax revenues should be part of deficit reduction, whereas Republicans are strongly opposed to anything that suggests a tax increase. This impasse, however, could be broken by a deficit reduction blueprint produced last December by the National Commission on Fiscal Responsibility and Reform (referred to as the Fiscal Commission). In March, 64 senators (32 Democrats and 32 Republicans) called on President Obama to support a broad approach for addressing the nation’s debt problem and stated that the Fiscal Commission’s “work represents an important foundation to achieve meaningful progress on our debt.” The Fiscal Commission’s plan cuts $4 trillion in deficits over the next 10 years and balances the budget by 2035.

The Fiscal Commission’s plan includes a number of tax reforms which, despite reflexive opposition from conservative antitax groups, were supported by all three Senate Republicans who served on the commission. The plan is appealing because it dramatically lowers rates, simplifies the tax code, enhances fairness and progressivity, and increases government revenues in order to reduce the deficit. The plan achieves its goal by eliminating or reforming the vast majority of the special preferences and tax expenditures found in the tax code. It also improves America’s competitiveness by lowering the corporate tax rate and moving to a territorial corporate tax system that is more aligned with the rest of the industrial world.

The plan, called the “Zero Tax Plan,” originated through the Fiscal Commission’s attempt to first “zero out” all tax expenditures and lower rates as much as possible. The plan would lower marginal tax rates to levels not seen since the Reagan administration while raising revenues in a progressive manner by approximately $800 billion over 10 years. The Zero Plan proposes to consolidate the existing six tax brackets (which today range from 10 percent to 35 percent) into three brackets of 8 percent, 14 percent, and 23 percent.

These tax rate reductions are made possible by eliminating all tax expenditures. The Zero Plan would make tax filing much simpler by ridding individual taxpayers of the need to keep track of their deductions. The plan would also eliminate the alternative minimum tax and the limitations placed on itemized deductions and personal exemptions. The Zero Plan would also eliminate the preferential tax rate for long-term capital gains and qualified dividends; in other words all income would be considered “ordinary” income.

The changes proposed by the Fiscal Commission’s Zero Plan include the following:
  • eliminating all $1.1 trillion of tax expenditures currently in the code;
  • eliminating the Alternative Minimum Tax and phasing out itemized deductions as well as the personal exemption;
  • consolidating the tax code into three individual rates and one corporate rate;
  • dedicating a portion of savings to deficit reduction and applying the rest to reducing all marginal tax rates; and
  • adding back in any desired tax expenditures and paying for them by increasing one or all of the rates from their zero-expenditure low
The Zero Plan appealed to many Republicans on the Fiscal Commission because it would cut rates and reduce the number of tax brackets. It appealed to the Democrats on the commission who wanted to raise revenues and close loopholes they felt were unfair and helped wealthier taxpayers game the system. If taxes are part of a final deal this summer over the debt ceiling, the Zero Plan, or a modification thereof, could wind up in the final package. If not, the Zero Plan could still become the guiding blueprint for tax changes down the road.
Bruce Moyer is government relations counsel for the FBA. © 2011 Bruce Moyer. All rights reserved.

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