Now we're talking! The National Commission on Fiscal Responsibility and Reform's (aka, the Deficit Commission) "Zero Plan" for personal and corporate income tax reform puts an excellent option on the table. Will President Obama and Congress listen?
The commission's bipartisan co-chairs, Erskine Bowles and Alan Simpson, have proposed reducing the number of personal income tax brackets from six to three. Shades of Ronald Reagan!
If all "tax expenditures"--tax deductions, credits and exclusions--were eliminated, the brackets could drop to 8 percent, 14 percent and 23 percent. In addition, the corporate tax rate would decline from 35 percent to 26 percent. And the Alternative Minimum Tax (AMT) would be eliminated.
There would certainly be resistance to eliminating the tax expenditures, but it's important to point out that the lower the tax brackets go, the less valuable tax breaks are in reducing a person's or company's tax obligation.
But what if Congress couldn't bring itself to eliminate some of those "third rail" tax breaks, like the home mortgage interest deduction or the health insurance tax exclusion? Bowles-Simpson suggests personal rates could still be lowered to 13 percent, 21 percent and 28 percent, and a corporate rate of 28 percent.
When taxes are simple to understand and brackets are low and broad based, that encourages people to work, save and invest--exactly what is needed to help the economy grow. Ironically, that is exactly the opposite direction being demanded by most Democrats, who want to increase the rates and narrow the tax base.
We might call the Bowles-Simpson proposal the anti-Obama tax plan.
In normal times we'd say that such a bold reform--especially eliminating the tax expenditures--wouldn't have a chance; but these aren't normal times. Lots of newly elected fiscal conservatives are on their way to Washington, and some might be willing to support a bold idea.
Elections have consequences, as the country learned, to its dismay, in 2008. Even if the commission's proposals as a whole are rejected, some brave congressman may want to embrace this tax reform and see what happens.