Tax breaks on brink? ‘Zero plan’ moves forward

Leaders of a presidential deficit commission recommend the elimination of all tax breaks for retirement, life insurance and employer-sponsored health care plans in their final report, which was released Wednesday and will be voted on by the full panel Friday morning.
The proposal is identical to the so-called “zero plan” that was one of the options for tax reform in the draft plan the commission co-chairmen released in November. It would slash $1.1 trillion annually of so-called “tax expenditures,” while significantly reducing individual tax rates, in an effort to cut the burgeoning federal deficit and debt. (View the so-called Zero Plan.)
The plan, “The Moment of Truth,” written by the National Commission on Fiscal Responsibility and Reform, would scrap every tax exclusion costing the federal government revenue. In addition, capital gains and dividends would be taxed as ordinary income.
Under this scenario, individual rates would be lowered to 8%, 14% and 23% from their projected 2011 levels, which range from 15% to 39.6%. The corporate tax rate would fall from the current 35% to 26%.
The commission offered a wide range of federal spending cuts and reforms for tax, health care and Social Security policy designed to achieve $4 trillion in deficit reduction through 2020 and reduce the deficit to 2.3% of the nation’s economic output by 2015.
The commission postponed a vote on the report until Friday morning. In order for the proposal to require congressional action, 14 of the panel’s 18 members would have to vote in favor of it. It was unclear from a Wednesday meeting of the group what level of support the final report will garner.
Jettisoning the tax expenditures is one of the signature elements of the proposal.
“The tax earmarks are spending by another name,” said Erskine Bowles, a commission co-chairman and former chief of staff to President Bill Clinton.
Mr. Bowles said that the commission has received positive responses to the idea from both Republican and Democrats. During the Wednesday meeting, a couple of Republican members of the commission praised two of the goals of the tax reform portion of the report — lowering rates and broadening the tax base.
“If we did the ‘zero plan,’ the explosion of economic activity in this country would be extraordinary,” said Sen. Judd Gregg, R-N.H., a member of the commission.
Other members of Mr. Gregg’s party, however, could resist removing tax exclusions, which they might define as raising taxes on retirement and insurance plans.
“There are a lot of deductions and credits in the tax code that are specifically aimed at achieving a certain objective like stimulating economic growth in a certain industry,” said Sen. Michael Crapo, R-Idaho, a member of the commission. “In that context, there are going to be a lot of people who are reluctant to see us simplify the tax code. The return for that, though, is that tax rates are brought down so dramatically.”
Many interest groups will be urging both Republicans and Democrats to protect the tax-favored status of retirement and insurance plans.
Brian Graff, executive director and chief executive of the American Society of Pension Professionals and Actuaries, said in a statement that the commission’s recommendations to remove retirement tax preferences “will threaten the stability of the established employer-sponsored retirement system that millions of American workers depend on — setting off a chain reaction that could undermine Americans’ retirement security in a tenuous economy.”
If groups such as ASPPA succeed in protecting their tax-favored status, the loss of revenue will have to be made up elsewhere, Mr. Bowles warned.
“Congress can choose to add back key provisions, recognizing that each add-back raises the rates; they are not free,” Mr. Bowles said.
Organizations on the left reacted angrily to recommendations to raise the Social Security retirement age and cut Medicare.
Commission co-chairman Alan Simpson, a former Republican senator from Wyoming, urged Congress to withstand pressure from the right and the left to water down deficit reduction efforts.
“They’ve been waiting a long time to chew this one to pieces,” Mr. Simpson said of Washington interest groups. “They’re geared up to destroy this work.”
Although many members of the commission declined to indicate how they’ll vote Friday, the majority praised the Simpson-Bowles proposal as a serious attempt to address a federal deficit, which is currently $1.29 trillion, and a massive federal debt that threaten the U.S. economy if the rest of the world suddenly decides to stop buying American Treasury bonds.
Even if Congress doesn’t take up the commission’s recommendations, the fact that they’ve been introduced means that they always will part of the milieu in federal budget discussions.
“We have fundamentally changed the debate in America,” Mr. Bowles said. “We have put the debt issue on the map. We have started an adult conversation. This is about America being competitive in the world. It is about pulling together, not pulling apart.”