Grab Bag of Tax, Spending Proposals Eyed to Cut Deficit

VIDEO: Erskine Bowles discusses fiscal responsibility and how to reduce the deficit.
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While taxpayers are impatiently waiting to hear if Congress will allow the Bush-era tax cuts expire in January, this week two groups introduced plans to cut federal expenditures and shrink the $13.7 trillion national debt with tax and policy changes. The authors' methods run the gamit, but are sure to affect everyone's pockets should they be enacted.

The first recommendation came Nov. 10 from the co-chairs of the White House's National Commission on Fiscal Responsibility and Reform, or the fiscal commission. It has been called the Bowles-Simpson draft proposal after the authors, Erskin Bowles, president of the University of North Carolina system and former White House chief of staff under Bill Clinton, and Alan Simpson, former Republican senator of Wyoming.

End to Bush Tax Cuts Looming
End to Bush Tax Cuts Looming

That 24-page document and corresponding 50 slide presentation differs greatly from the 140-page proposal from yesterday's Bipartisan Policy Center's debt reduction task force. That recommendation has been called the debt reduction or Domenici-Rivlin plan, after former Republican Sen. Pete Domenici of New Mexico and Alice Rivlin, former vice chair of the Federal Reserve and also on the board of the fiscal commission.

A Year-Long Payroll Tax Holiday

One of the most dramatic proposals may have been yesterday's debt reduction plan's "payroll tax holiday" that suspends Social Security payroll taxes for all of 2011. This move aims to keep money in employee paychecks and incentivize companies to hire more people.

While dramatic, the task force said the payroll holiday will immediately spur economic growth.

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"Our first priority is to generate a healthy economy," said former Michigan Gov. Jim Blanchard, a member of the task force. "That's why we suggested a payroll tax holiday right away. We phase in a lot of the rest of our plans so we don't interfere with an economic recovery." Many economists agree that an immediate payroll holiday would provide taxpayers greater incentive to purchase more.

"Anytime you're doing a payroll tax holiday, you're giving money to consumers faster," said Kacy Gott, chief planning officer for wealth management firm Aspiriant. "So if you're looking for stimulus quickly, that would have an effect. Whether or not it makes sense to do that is another issue. It's certainly an efficient and very quick method."

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The task force claimed the payroll tax holiday, which will affect about 125 million workers, will spur growth through a tax cut of $650 billion.

"A temporary payroll tax cut is, in spirit, a good one," said Nada Eissa, Georgetown University economics and public policy professor, who pointed to the benefit of giving tax relief to lower income brackets. "Higher-income brackets tend to escape the payroll tax. This is a good way to provide relief and incentives so people are encouraged to go out and work more for a boost to the economy."

Social Security

The Bowles-Simpson draft proposal from Erskin Bowles, president of the University of North Carolina system and former White House chief of staff under Bill Clinton, and Alan Simpson, former Republican senator of Wyoming, aims to increase the retirement age to qualify for Social Security to 69 by 2075.

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The debt reduction plan did not raise the Social Security retirement age and instead called for raising the cap on Social Security payroll taxes (currently at $106,800) over the next 38 years such that 90 percent of all wages are covered, the target in 1983.

"The plan we're putting forward today will strengthen social security so it will pay benefits in a fair and equitable way for the next 75 years and beyond," said Bill Novelli, member of the debt reduction task force and former chief executive of the American Association of Retired Persons. "Our plan also slightly reduces the growth in benefits for the top 25 percent of beneficiaries as with current law. These changes are designed to increase incentive to work longer while not raising the retirement age."

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Professor Eissa said she disagrees because increasing the retirement age is necessary for the Social Security program's sustainability. "I think that absolutely has to be part of the reform," said Eissa. "We have to be careful how we adjust the program actuarially. But given life expectancy, the health of the program requires that we increase the retirement age."

Alternative Minimum Tax

Both the Bowles-Simpson and debt reduction plans eliminate the Alternative Minimum Tax (AMT), which aims to ensure that taxpayers who take special deductions and credits still pay a minimum amount. In 2009, Congress passed legislation which subjected fewer taxpayers to the AMT. But unless Congress acts soon, more people will have to file under its complex system, said Gott.

End to Bush Tax Cuts Looming
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While the intent of the AMT was to prevent high-income taxpayers from avoiding federal income taxes, its reach has expanded.

"If the Bush tax cuts do lapse, we'll have less people in the AMT," said Gott. "On the other hand, some of the phase-outs have gone away this year so people who are in the AMT will be paying more. That's an issue middle-income tax payers get hit with and are surprised by."

For individuals, the 2009 rate was 26 percent for income up to $175,000 and 28 percent for higher incomes and taxpayers may not deduct for local and state taxes. The basic exemptions in 2009 were $46,700 for single individuals and $70, 950 for married couples filing jointly, according to H&R Block.

End to Bush Tax Cuts Looming
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Simplifying the Tax Code

While both plans hope to simplify the tax code, the Bowles-Simpson proposal aims to place a cap on revenue from taxes at 21 percent of GDP, and to broaden the tax base, "lower rates and bring down the deficit," according to the draft presentation.

With that same goal in mind, the debt reduction plan, on the other hand, proposed to reduced income tax rates and decrease the number of tax brackets to two from six. The plan proposes two tax rates of 15 percent and 17 percent.

The long-term benefits of simplifying the tax code will have a positive effect on the economy through individuals and companies who are paying lower taxes, according to Eissa.

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"I believe the best way to deal with deficit problem is through economic growth," said Eissa.

National Sales Tax

Another stark difference between the two proposals is the debt reduction plan's proposal to create a national sales tax of 6.5 percent, in part, to offset the possible decreased tax revenue.

"We think it's a moderate rate," said Alice Rivlin. "We think the tax package has to be seen as a whole, and will be pro-growth, pro-saving and investment and somewhat less pro-consumption."

However, there could be a number of complications with a national sales tax, Shama Gamkhar, economics professor at the University of Texas at Austin.

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One is the intergovernmental issues between states and the federal government.

"What does this do for state and locality incomes?" Gamkhar asked. She said some states have almost no state income taxes balanced by high state sales taxes. "Right now, the sales tax is pretty much a state and local domain."

According to Gamkhar, the goal of a progressive income tax structure is to redistribute revenue at the federal level. Imposing "a national sales tax could change the distributional implications," she said. "So politically I think there's going to be a volatile issue."

Former Gov. Blanchard said the next step of these proposals is uncertain, but the task force of the debt reduction plan have been speaking with members of Congress and distributing the proposal.

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Many economists and policy analysts see a low feasibility that any of these proposals will see the light of day in Congress.

"It's very hard to say at this point," said Gamkhar. "I think the recent change in Congress certainly speaks to reform in some sense, by voter mandate. But what the composition of that reform will be, it's unclear right now."

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