Current Proposed Tax Overhaul

Posted on July 25, 2011

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As Congress struggles to raise the debt limit a tax reform plan is picking up momentum.  It is contained in a major deficit reduction package
put forward by a bipartisan group of six senators.  Tax overhaul would be a big revenue raiser with $1 trillion over 10 years when compared to current law
with its 35% top rate.  But the proposal’s tax hikes raise far less money than if all the Bush tax cuts were allowed to expire as scheduled after next year.
Huge spending cuts would also be included (approximately three times larger than the tax hikes.)
The package is just an outline for now.  Many details are left for later, to be filled in by House and Senate taxwriters, consistent with the revenue goals. While the plan isn’t likely to be passed this year, Obama’s tacit approval of it means you can’t dismiss what they have put on the table.
The current six income tax brackets would be consolidated to just three.  The bottom bracket would be set between 8% and 12%, the middle one between 14%
and 22% and the top bracket would fall between 23% and 29%…down from 35% now.  Basically, the highest end of each bracket is the same as the tax rate structure proposed last year by Obama’s deficit reduction commission. The lower the tax rate that taxwriters set for each bracket, the more tax breaks they will need to eliminate.
The alternative minimum tax would be history…permanently repealed.
The benefits of the earned income credit and child credit would be preserved.
If taxwriters choose to scrap these credits, the proposal requires them at a minimum to provide at least the same level of support for the taxpayers claiming these breaks.

But there’s lots of pain included, especially with $1 trillion in net tax hikes.
Itemized deductions would be slashed. Specifically, the plan’s proponents
say they want to reform the deductions for homeownership and charitable giving.  One way to do this is to limit the value of itemized deductions for upper-incomers, such as converting the deductions to a 12% tax credit, as Obama’s commission did.  And the mortgage interest deduction could be pared by limiting the interest write-off to somewhere around $500,000 of acquisition debt.

Also on the chopping block:  Home-equity loan interest and interest paid on mortgages on second residences.

Deductions for retirement savings would be curbed. To maximize revenue,
not only would the 401(k) payin ceiling have to be lowered, but payins to other plans…IRAs, Keoghs, profit-sharing plans and the like…would have to be cut back as well.
For businesses, the top corporate rate would fall to between 23% and 29%.  However, the tax base would be broadened. That would certainly mean companies would lose the deduction for domestic production, depreciation on assets would be taken over longer periods and the R&D credit would be trimmed or dropped.
The proposal calls for a revenue-neutral restructuring of corporate taxes.
That won’t fly. The 1986 tax reform law levied a big tax hike on businesses.
It’ll be easier to sell reform to the public if individuals and businesses share the pain.

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