If you want to pass a deficit reduction plan, you might want to give the task to one set of experts whose ideas would get more notice than your garden variety think-tank white paper: President Bill Clinton's former Treasury staff. So that's exactly what the Center for American Progress has done.
On Tuesday, CAP unveiled a tax reform plan written by a rogue's gallery of Clinton vets, including former treasury secretaries Robert Rubin and Larry Summers, deputy treasury secretary Roger Altman, White House chief of staff John Podesta, commerce secretary Bill Daley and others. Summers and Daley, as well as report co-author and CAP president Neera Tanden, all held high-ranking posts in the Obama administration.
The $4 trillion deficit-reduction plan the group came up with raises $1.8 trillion in new revenue through tax reform, $1.5 trillion through enforcing existing budget caps, and $485 billion in cuts to Medicare and defense spending. It adds $400 billion in stimulus and infrastructure investments meant to help growth. If implemented, that proposal would get debt-to-GDP down to 72 percent in 2022, or about where it is today. The importance of that measure is highly questionable, but insofar as one wants deficit reduction, the plan accomplishes that goal.
Five brackets: 15 percent up to $100,000 for couples filing jointly, 21 percent up to $150,000, 25 percent up to $200,000, 35 percent up to $422,000, and 39.6 percent thereafter. That keeps the bottom and top rates where they were under Clinton and avoids the perplexing top-rate reductions included in many deficit reduction plans, including those by the Simpson-Bowles commission and the Domenici-Rivlin task force. Those upper-income rate cuts are a curious feature to include in a plan intended to cut the deficit, as the CAP report authors note in a footnote.
Despite the rise in the bottom rate from 10 percent to 15 percent, most taxpayers would be in a lower tax bracket under this rate schedule. That's because the 15 percent bracket now applies to up to $70,000 in income, whereas the CAP plan would push that up to $100,000. So, upper-middle-class people making between $70,000 and $100,000 a year might get a break. That said, the schedule is a net tax increase for people making below $70,000, because the first $17,000 or so of their income is no longer taxed at a lower rate.
Cast deductions into credits: Realizing that most deductions help the rich more than the poor, because of the latter's higher marginal tax rates, the CAP plan converts all deductions (save the one for charitable giving) into 18 percent, nonrefundable credits. That is a net boon for everyone in the 10 percent and 15 percent brackets—the vast majority of taxpayers, and it makes the plan a net win for people making under $70,000. But it's a tax increase on those in higher brackets. Many tax experts have suggested this change, and it's a feature of many tax reform plans, including Simpson-Bowles and Domenici-Rivlin.
The deduction for charitable giving is turned into an 28 percent credit, which would hurt giving, but not as much as conversion to a 18 percent credit would. The plan also converts the standard deduction to a $5,000 credit ($2,500 for singles), which would wipe out many families' tax burdens entirely.
Tax capital gains, but maintain a preference: The plan would raise the capital gains tax rate to 28 percent, including the 3.8 percent surtax passed as part of Obamacare. That's way above the 15 percent rate currently in effect, and the 20 percent rate in effect at the end of the Clinton years, but it's the same rate that was in effect from 1986 to 1996 and still lower than the top rate on wage income. That reflects the consensus among economists that capital gains should get a preference, if not be tax-free altogether. Many other tax plans, including Simpson-Bowles and Domenici-Rivlin, do away with the preference altogether. Additionally, the CAP plan does away with the "carried-interest loophole", which allows investment professionals (such as Mitt Romney or noted hedge fund executive and CAP plan coauthor Roger Altman) to pay capital gains rates on ordinary income.
End minimum tax provisions: The proposal abolishes the Alternative Minimum Tax and the Pease limits on deductions, both of which were intended to set a minimum amount that the rich have to pay in taxes, and to prevent tax evasion through tax deductions. But they do not adopt a "Buffett rule," which sets a minimum rate on those making more than $1 million to ensure that the affluent do not pay less in taxes than middle-class earners, or other provision to replace those policies. That could make the plan liable to the kind of manipulation that made the AMT necessary in the first place.
Tax bad stuff: The proposal also raises taxes on cigarettes and alcohol, citing that those consumer goods are taxed too little, given their huge societal costs. It also explicitly legalizes and taxes Internet gambling. The plan doesn't include other potential "Pigovian" taxes of this kind, such as taxes on carbon, gasoline or soda.
Details of the charitable credit have been corrected.