Thursday, November 11, 2010

Obama's Debt Panel Releases Three Tax Reform Options

Earlier today President Obama's National Commission on Fiscal Responsibility and Reform released a draft of their report on options for tax reform. The final report is due to be issued on the first of December. You can download a PDF of the report here or check out the following summary of the three options courtesy of the TaxProf.

Option 1: The Zero Plan

  • Consolidate the tax code into three individual rates and one corporate rate
  • Eliminate the AMT, Pease, and PEP
  • Eliminate all $1.1 trillion of tax expenditures
  • Dedicate a portion of savings to deficit reduction and apply the rest to reduce all marginal tax rates
  • Add back in any desired tax expenditures, and pay for them by increasing one or all of the rates from their zero expenditure low

Option 2: Wyden-Gregg Style Reform Individual Tax Reform

  • Repeal AMT, PEP, and Pease
  • Establish 3 rates – 15%, 25% and 35%
  • Triple standard deduction to $30,000 ($15,000 for individuals)
  • Repeal state & local tax deduction, cafeteria plans, and miscellaneous itemized deductions
  • Limit mortgage deduction to exclude 2nd residences, home equity loans, and mortgages over $500,000
  • Limit charitable deduction with floor at 2% of AGI
  • Cap income tax exclusion for employer-provided healthcare at the amount of the actuarial value of FEHBP standard option
  • Modify and repeal several other tax expenditures
  • Dedicate portion of savings to deficit reduction Corporate tax reform * Reduce corporate tax rate to 26%
  • Permanently extend the research credit
  • Eliminate and modify several business tax expenditures, including:
    • Domestic production deduction
    • LIFO method of accounting
    • Energy tax preferences for the oil and gas industry
    • Depreciation rules
  • International tax reform including a territorial system

Option 3: Tax Reform Trigger

  • Call on Finance and Ways & Means Committees and Treasury to develop and enact comprehensive tax reform by end of 2012
  • Put in place across-the-board “haircut” for itemized deductions, employer health exclusion, and general business credits that would take effect in 2013 if reform is not yet enacted
  • Haircut would limit proportion of deductions and exclusions individuals could take to around 85% in 2015. Similarly, corporations would only take some proportion of their general business credits
  • Set haircut to increase over time until tax reform is enacted

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