The Wyden-Gregg Tax Reform: More Progressive and Roughly Revenue Neutral

The bipartisan tax reform proposal of senators Ron Wyden (D-OR) and Judd Gregg (R-NH) roughly breaks even (as the lawmakers intended) and makes the tax code somewhat more progressive, according to a new analysis by the Tax Policy Center.

TPC analysts Jim Nunns and Jeff Rohaly estimate the Wyden-Gregg plan would raise about $22 billion through 2020 compared to TPC’s “current policy” baseline. That’s a tiny fraction of the $35 trillion Treasury is expected to collect over the decade. The reform plan—called the Bipartisan Tax Fairness and Simplification Act of 2010 (BTSFA or S. 3018)– would lose a bit in the first few years, but generate slowly increasing amounts of new tax revenue after that.

It would modestly cut taxes—and thus boost after-tax incomes– for typical households earning $100,000 or less. For instance, those making $50,000 to $75,000 would get an average tax cut of about $630. While on average low-income households would benefit from the plan, about 20 percent would be worse off, mostly because it would reduce the inflation adjustment for the Earned Income Credit and thus slightly reduces its benefits.

Typical high-income households would face bigger tax bills. The plan would cut after-tax incomes by 1.7 percent for the top 1 percent of earners (those making $633,000 or more), and by 2.3 percent for the top 0.1 percent. Wyden-Gregg would raise taxes on households making more than $1 million by an average of $42,500.

The Wyden-Gregg plan would make major changes in both the individual and corporate income taxes. But, unlike some reform proposals, it remains firmly rooted in the income tax rather than a Value-Added Tax or other consumption tax. Much like the Tax Reform Act of 1986, it aims to simplify the code without dramatically restructuring it and neither cuts taxes nor raises them (not by much anyway). But unlike the ’86 Act, which offset big individual tax cuts with large business tax hikes, this proposal would raise individual income tax revenues modestly while cutting corporate taxes by $200 billion over 10 years.

For individuals, Wyden-Gregg would reduce the number of rates from six to three—15 percent, 25 percent and 35 percent. Joint filers would fall into the 35 percent bracket once their taxable income reaches $140,000. Brackets still would be indexed for inflation but tied to a less generous price measure. The standard deduction would nearly triple to $30,000 for joint filers (it is only $11,400 today). The rate on capital gains and dividends, now a maximum of 15 percent, would be replaced with a 35 percent exclusion. That translates to a top rate of  22.75 percent. Finally, the plan would eliminate some deductions, credits and exclusions.

On the business side, the proposal would cut the corporate rate to a flat 24 percent from today’s 35 percent maximum while eliminating many tax preferences and simplifying rules for small firms.  

Two caveats: First, TPC measured Wyden-Gregg against current policy that assumes the 2001 and 2003 Bush tax cuts will be extended and most middle-class households will continue to be protected from the Alternative Minimum Tax. Thus, it does nothing to help fill the $3 trillion hole that extending these tax cuts creates. In addition, the estimates assume taxpayers won’t change behavior in response to the proposal. However, while Jim and Jeff can’t quantify it, they figure both individuals and businesses would find ways to reduce their taxable income. That would likely result in the plan losing some revenue, even compared to current policy.

In sum, TPC found that Wyden-Gregg is pretty much as advertised. It is revenue neutral (at least compared to current policy), somewhat more progressive, and simpler than today’s Code. It may not be as much reform as some would like, and it doesn’t do anything for the budget deficit. Thus, it may be criticized for the sin of being a missed opportunity. But it is, in many respects, better than what we’ve got. 

And one other thing. They’ve got to work on the acronym. BTFSA just won’t cut it.