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Tax News & Views
Senate Finance Committee Chairman Max Baucus, D-Mont., convened a hearing on June 19 to examine recommendations for deficit reduction and tax reform offered by the Bipartisan Policy Center. The hearing, which Baucus announced during a June 11 speech on tax reform, gave Senate taxwriters the chance to learn about the plan from its architects – Pete Domenici, the former Republican senator from New Mexico, and Alice Rivlin, the former director of both the Congressional Budget Office and the White House Office of Management and Budget during the Clinton administration, who co-chaired the Bipartisan Policy Center’s debt reduction task force.
The plan, which was released in late 2010, would reduce long-term deficits by cutting discretionary spending and making changes to lower the cost of entitlements – particularly Medicare – on the spending side, while reforming the tax code on the revenue side. It would replace the current tax rate structure with two individual rates of 15 and 28 percent and a corporate rate of 28 percent, and would treat capital gains and dividend income as ordinary income. Further, it would eliminate or phase out many tax expenditures – such as the deduction for state and local taxes and the exclusion for employer-provided health insurance – and replace others – such as the deductions for mortgage interest and charitable contributions – with credits.
Rivlin described the Medicare plan, which would add a regulated market of optional private plans and a premium support program, as a way to preserve the current system’s guarantee while reducing its costs. Domenici and Rivlin said that their task force was working on another project to analyze more options and policies to contain health care costs. Participants in that project – which include former Senate majority leaders Bill Frist, R-Tenn., and Tom Daschle, D-S.D. – will work over the next year and provide their findings to Congress.
Reform and the ‘fiscal cliff’
In his opening statement, Baucus outlined what he thinks a good deficit plan should include, such as a practical and responsible approach to lowering deficits, balancing spending and revenue, and encouraging economic growth. He said that the Bipartisan Policy Center plan met most of these goals, but he did have some reservations about it, particularly about the way it would reform Medicare. Baucus said he was concerned that a Bipartisan Policy Center-style reform would unfairly shift costs onto seniors and the states. He also noted that he thinks changes to Social Security should be made outside the context of deficit reduction.
Finance Committee ranking Republican Orrin Hatch of Utah used his opening statement to highlight the slow economic recovery and the fear that failure to act on taxes could push the country over the “fiscal cliff” at the end of the year when the Bush tax cuts expire.
Domenici agreed that uncertainty about taxes was hurting the economy. He and Rivlin stressed that federal debt and deficits need to be stabilized and reduced. Failure to do so could lead to catastrophic economic results, Domenici said. However, they were not heartened by congressional action to date. They noted that discretionary spending had already been cut to about the level they had called for in their plan, but that Congress had made no progress on entitlement reform or addressing the so-called fiscal cliff. Domenici told the committee that Congress must act on entitlements because waiting much longer will be too late. Further, he told the committee that it already had jurisdiction over most of the issues in play, and there was no need to create a supercommittee to address them.
Hatch criticized President Obama for failing to lead on tax reform, and fellow GOP taxwriters John Cornyn of Texas and Olympia Snowe of Maine returned to this criticism in later questioning. They lamented the lack of presidential leadership on the issue and wondered how tax reform could be accomplished without it. Rivlin and Domenici agreed that the president’s support was needed, and Domenici added that the president could help garner support from the public for tax reform.
Baucus asked about the key differences between the Bipartisan Policy Center’s plan and the one advanced by Erskine Bowles and Alan Simpson, the co-chairs of the president’s deficit commission. (Bowles and Simpson released their recommendations around the same time as the Bipartisan Policy Center issued its plan. The Finance Committee intends to hold a separate hearing on the Bowles-Simpson plan, but a date for that hearing has not yet been announced.)
Rivlin said the two plans shared a similar approach to tax issues, but differed significantly in the way they address Medicare. The Bipartisan Policy Center plan advocates premium supports, she explained.
Baucus also asked about the need for additional revenue, hinting at GOP opposition to increased taxes. Domenici said he interpreted the opposition as a rejection of ever-increasing taxes to pay for ever-increasing health care costs. By addressing the health care issue, the plan would get spending and taxes under control, he said.
Rivlin noted that historic levels of revenue (around 19 percent of gross domestic product) cannot fund the same level of services as the population ages and the number of retirees increases. She said Bipartisan Policy Center’s plan would raise about an extra $2.6 trillion over 10 years. Sen. Kent Conrad, D-N.D., who is also chairman of the Budget Committee, commented that depending on what baseline is used, $2.6 trillion could actually amount to a tax cut.
Why not a VAT?
The first version of the Bipartisan Policy Center plan had called for a value-added tax (VAT) to fund deficit reduction. That proposal was subsequently dropped, however, and the top corporate and individual rates were increased slightly to make up the difference. Hatch asked why the VAT proposal was dropped and whether the rate changes covered the revenue difference. Rivlin said that the rate increase did not make up the entire difference. Domenici explained that the VAT was dropped from the plan because of a lack of political support; however, he said that he still thinks a VAT is a good idea. Sen. Ben Cardin, D-Md., likewise expressed support for keeping a VAT option on the table. Rivlin agreed and added that she thought Congress should also consider a carbon tax. However, Domenici stated he did not support such a tax.
Passthroughs and investment income
Sen. Ron Wyden, D-Ore., who has proposed his own tax reform plan with Sen. Dan Coats, R-Ind., commented that a lot of business in the United States is conducted by passthrough entities. Rivlin explained that fact was the reason why the Bipartisan Policy Center plan called for the same top rate for individuals and corporations, so that tax considerations would not distort choice-of-entity decisions.
Sen. John Thune, R-S.D., questioned the wisdom of the task force’s recommendation to eliminate the preferential rate for capital gain income. Rivlin replied the evidence indicated the differential was not necessary. When the task force members looked back at the history of rate changes, she said, they saw little effect on investment other than one-time sell-offs immediately before rate changes went into effect.
In response to a similar question from Sen. Robert Menendez, D-N.J., Rivlin explained that she thought equalizing the rates between wage and investment income was the most sensible way to structure the system. Further, she said the level of progressivity in the Bipartisan Policy Center plan was the same as the current code. Domenici, for his part, added that he thinks it is more progressive than the current system.
(Note: Baucus and House Ways and Means Committee Chairman Dave Camp, R-Mich., announced June 21 that the two congressional taxwriting committees will hold a joint hearing to explore the issue of capital gains taxation in the context of tax reform. The hearing is set for June 28.)
— Jon Almeras
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