WASHINGTON -- A new bipartisan plan to reduce government borrowing would target some of the most cherished tax breaks enjoyed by millions of families -- those promoting health insurance, home ownership, charitable giving and retirement savings -- in exchange for lowering overall tax rates for everyone.
Many taxpayers would face higher taxes -- a total of at least $1.2 trillion over the next decade, and perhaps more.
The plan, released this week by the bipartisan "Gang of Six" senators, punts on many of the most difficult issues, leaving it to congressional committees to fill in the details later. But supporters say it provides a framework to simplify the tax code, making it easier for businesses and individuals to comply while eliminating incentives to game the system.
Coupled with spending cuts, the plan would reduce deficits by nearly $4 trillion over the next decade. President Barack Obama and senators from both parties lauded the plan as a possible breakthrough in negotiations to allow the government to incur further debt and avert a possible default on U.S. obligations on Aug. 2.
Some congressional leaders, however, said the plan lacks details and could produce much bigger tax increases than advertised. The Republican staff of the House Budget Committee issued a critique saying the revenue increase could exceed $2 trillion over the next decade, when compared with current tax policy.
Simplify tax code
--Reducing the number of tax brackets from six to three,
--Lower the top rate from 35 percent to somewhere between 23 percent and 29 percent.
How to pay for it
Reduce tax breaks for:
Other tax breaks would be spared
--The $1,000-per-child tax credit
--The earned income tax credit
Alternative minimum tax would be repealed.
Current law allows homeowners to deduct the interest they pay on home mortgages of up to $1 million. One proposal would lower the limit to $500,000 and exclude mortgage interest on second homes.
Starting in 2018, the new health care law would tax high-priced health insurance plans. There are several proposals to adjust the tax to include more health plans while sparing lower-income families with more modest coverage.
The Gang of Six plan is silent about taxes on capital gains and dividends, but tax experts said it would be difficult to generate more than $1 trillion in additional revenue without increasing taxes on investments.
The current top rate on capital gains and dividends is 15 percent -- well below the top rate for ordinary income.
"No matter what they do on the revenue side, by some measure they are going to be taking something away from somebody," Steuerle said. "The whole budget package is about asking a lot of people to give up something they think they have."
On the business side, the plan would lower the corporate income tax rate from 35 percent to somewhere between 23 percent and 29 percent, all of which would be funded by eliminating unspecified tax breaks for businesses.
Under current law, the U.S. taxes overseas profits of American corporations but only after they return those profits to the U.S. The proposal calls for a territorial tax system, which would tax only profits made in the U.S. The proposal could be a huge windfall for U.S.-based multinational corporations, though it would supposedly be financed by eliminating many of the tax breaks those same companies enjoy.
Business groups have already been lobbying Congress to keep their tax breaks and to create new ones, an effort that will only intensify if lawmakers dive into the details of overhauling the tax code.
"The bookshelves of policy analysts in Washington are loaded with statements of principle on tax reform that all sound good," said William Gale, an adviser to President George H. W. Bush's Council of Economic Advisers and now co-director of the Tax Policy Center. "And then they all die when you try to specify the details."