White House Deficit Reduction Panel Issues "Moment of Truth" Report
Summary
Co-chairmen of President Obama's "National Commission on Fiscal Responsibility and Reform" Erskine Bowles and Alan Simpson today released a report entitled, "Moment of Truth" which contains tax reform recommendations designed to reduce the deficit.
When fully phased in, individual income tax brackets would cut across the board with the top rate to between 23% and 29%. Other tax proposals affecting individuals include:
- a permanent repeal of the AMT, Personal Exemption Phase-out, and phase out of itemized deductions
- elimination of all itemized deductions
- all capital gains taxed at ordinary income rates
- a 12% non-refundable tax credit (meaning only taxpayers who owe tax are entitled to receive it) mortgage interest. The credit would be capped at $500,000 for not available for second residence or equity lines.
- a 12% non-refundable tax credit available to all taxpayers for charitable gifts. The credit would apply only to charitable gifts exceeding 2% of Adjusted Gross Income (AGI)
- taxing as income interest for newly-issued state and municipal bonds
- consolidating retirement accounts; capping tax-preferred contributions to lower of $20,000 or 20% of income, expand saver’s credit; and
- eliminating nearly all other income tax expenditures
Observations
Regarding the plan's charitable provisions, the use of a tax credit would balance the tax benefit for all taxpayers. Under current law, those in higher tax brackets receive a greater tax benefit. However, the plan's 2% of AGI floor would be a disincentive to donors giving smaller amounts.
Although not discussed in the report, the elimination of preferential capital gains rates would incentivize donors to consider contributing appreciated noncash assets such as securities, real estate, and business interests because giving such assets would enable them to avoid capital gains taxes on such assets at higher rates. This would affect both outright gifts and via split-interest gift vehicles such as charitable gift annuities and charitable remainder trusts. Pooled income funds might also see resurgence due to a leveling of the taxation of distributions compared to CGAs and CRTs. Pooled income fund distributions are taxed at ordinary income rates making them less attractive when compared to CGAs and CRTs which can distribute long-term capital gains and principal.
The full panel will vote on proposal this Friday. If 14 of the 18 members endorse the plan, it will then go to Congress for a vote. However, given the plan's dramatic recommendations, particularly those regarding home mortgage interest, many observers are dubious regarding its chances.
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