Bowles-Simpson Deficit Plan Would Hike Taxes Across-The-Board
Critics of the deficit reduction plan offered by the co-chairs of President Obama’s fiscal commission have blasted it for being both a tax hike (bad if you’re a conservative) or a tax cut for the wealthy (bad if you’re a liberal). So which is it?
The Tax Policy Center has taken a preliminary look at one version of the tax plan offered by Erskine Bowles and Alan Simpson. And Paul Krugman & friends can rest easy. The Bowles-Simpson proposal is indeed an across-the-board tax increase– and a fairly progressive one at that. In 2015, the lowest earners would face an average cut in their after-tax income of 3.4 percent or about $400. Middle-income households (those earning an average of about $60,000) would see their after-tax incomes fall by 4 percent or about $1,900. On the other end of the economic food chain, the top one percent of earners (who earn an average of about $2 million) would lose about $77,000 (5.3 percent) while the top 0.1 percent would see their after-tax incomes cut by nearly 8 percent, or close to $500,000.
The TPC estimate comes with a number of caveats. It assumes essentially the law we had in 2009. The 2001 and 2003 tax cuts still apply in 2015, about 25 million middle-income households continue to be protected from the Alternative Minimum Tax, and the 2009 estate tax is back on the books. Given political realities these days, that guess is a good as any, but it is a guess. And if the Bush-era tax cuts actually do expire, the distributional impact of the Bowles-Simpson plan would be quite different: While low-income households and the top one 0.1 percent of earners would be hit with a tax increase, the upper middle class would enjoy a small tax cut averaging about 1 percent.
The TPC estimate is also static, thus it assumes no behavioral response to the proposed tax law changes. However, thanks to lower marginal rates and the smaller deficit in the overall plan, the economy could grow faster than the co-chairs predict and generate more tax revenue.
In addition, keep in mind that Bowles and Simpson did not propose a single tax reform plan. Rather, they offered a number of possible versions. The most radical is getting the most attention, but it is less a plan than a concept. The idea: eliminate or scale back the nearly $1 trillion in targeted tax breaks–such as the mortgage interest deduction, the exclusion for employer-sponsored health insurance, and credits for hybrid cars–that currently litter the Revenue Code. Simpson and Bowles would use some of the cash to lower rates and the rest to reduce the deficit by about $750 billion over a decade.
While Bowles and Simpson start with the goal of ending all tax expenditures, neither has just fallen off the proverbial cabbage truck. They recognize that completely wiping out such favorites as the mortgage interest deduction is about as likely as the Dallas Cowboys winning this year’s Super Bowl. Thus, they also propose scaled back versions that would trim but not eliminate popular tax breaks.
Because modeling a concept is not so easy, TPC picked the version of their plan that would eliminate all deductions, credits, and exclusions except for the earned income credit and the child credit (two big safety net programs for working families). In this option, Bowles and Simpson would drive individual tax rates down to 9, 15, and 24 percent and repeal the AMT. Importantly for the fate of high-earners, however, their plan would also tax capital gains and dividends as ordinary income and end the loophole that allows gains to go tax free if they are held until death.
It is important to remember that the co-chairs have not introduced a bill. Rather, they have created a 50-page powerpoint with the aim of delivering a simple message: If we are serious about balancing the budget and managing our debt, we are all going to have to sacrifice. We all must live with fewer government services and benefits than we anticipated, and higher taxes. The details can be sorted out later.
Thus, Bowles and Simpson have a clear goal: They want to raise taxes across the board while lowering rates. And TPC’s preliminary projections suggest that’s pretty much what they’d do.
Btw, as TPC learns more details about their other reform variations–such as trimming, but not eliminating, other deductions and credits–we’ll model them as well.
We know what elimination looks like and what full retention looks like. While there are likely serveral possible scenarios for an 80% benefit, the set is not infinite. I suggest an income cap and a phase out as two of them, with a third being division of the current benefit by .8. More importantly, the model where no interest or retirment benefits are included but the entire Child Tax Credit/EITC can be modeled to come up with a reasonable number – Option Zero + 1.
I am not sure that I agree with Gleckman's analysis of the facts. I looked at the distribution table and Table T10-0247 clearly states that the top quintile of taxpayers gains 0.8% in after tax income while the two lowest quintiles lose -2.7%. Overall after tax income decreases by -0.3%.
This is not the issue of liberal v. conservative, Americans are so confused about, nor can the Bowles-Simpson Deficit Commission proposal even be charitably termed, libertarian because its lenience to the richest does not also liberate the poor, this is fascism.
The Bowles Simpson Deficit Commission needs to be investigated by the Government Ethics Committee for bribes, kickbacks and all around corruption. Having finished stabbing totalitarian leftist Rangel in the back they should have plenty of time to investigate this false represenatives of the extreme right wing, whose fascism should be censored before it corrupts the masses.
The inequality of the Bowles-Simpson Deficit Plan will weaken the USA's failing claim to highly industrialized nation status. This “deficit commission” is a wolf in wolve's clothing. No plan to tax can be introduced in good faith without a plan to reign in spending. In fact, I have proven that the deficit can be brought within 3% of GDP by spending limits alone, but do not send the link because TCP has neither responded nor purchased the copyright and as I said these are wolves we are talking about. Indict the Bowles-Simpson Deficit Plan for ethical violations allowed to corrupt the mass media and TCP analysts to misrepresent the facts with their propaganda.
As he looked up, Jesus saw the rich putting their figts into the temple treasury. He also saw a poor widow put in two very small copper coins. “I will tell you the truth” he said, “this poor widow has put in more than all the other. All these poeople give their gifts out of their wealth, but she out of her poverty put in all she had to live on”. (Luke 21:1-4)
This is Beltway propaganda at its best. How can you so confidently declare that Krugman and others can “rest easy” when you later acknowledge that the “BS Plan” does not exist? How can you say in the headline that the “Plan” WOULD raise taxes across the board when you acknowledge that there is no “BS Plan”??
The point of this commission is to pressure Congress to do what the vast majority of the American people strongly oppose: cut Social Security and Medicare.
Your assumptions are silly and unscientific. When push comes to shove, the lower tax rates for the rich will remain, along with the benefit cuts for the middle and lower income classes.
If you guys are so neutral and non-partisan, then why don't you publish an analysis of Social Security's solvency and discuss why we need to cut a program that is solvent for at least a quarter century?
Michael, That's a little harsh. None of the B-S plans are likely to ever be enacted, but they are useful measuring rods and have gotten a lot of press attention. Their distributional effects are certainly relevant.
Also, the 80% reductions are completely unspecified so impossible to model sensibly. Howard's post says that TPC will model them when there's enough detail to know what the plan is.
TPC chose the wrong plan to model, since the Maya MacGuinness inspired no tax benefit plan is unlikely in the extreme. I suspect that the “school solution” for Simpson-Bowles is likely the version where the Child Tax Credit/EITC is continued while 80% of Health, Mortgage and Retirement benefits are retained, etc.
Try again if you are looking to do relevant analysis.