Monday, December 10, 2012

Simpson Bowles on Taxes

Any plan that congress agrees on to avert the fiscal cliff must include some sort of tax reform.  There is little way around it.  The politicians tend to skirt the issue, we need to have a grown up conversation about how to improve our tax code.  We can make it simpler, and we can make it fairer.  There won't be any magical plans that promote 10% GDP growth and eliminate all debt by 2015.   It's just not going to happen.  What can happen though, is small steps in the right direction.  The Simpson-Bowles plan makes such a step, pushing the dialogue forward on meaningful tax reform.

Below is a graphic illustrating the Simpson Bowles plan on taxes.
While the above chart might seem complicated, we've set out to describe, in simpler terms, the major elements of the Simpson-Bowles tax proposal.

First off, the Simpson-Bowles plan eliminates the Bush era tax cuts for the wealthiest Americans.  This is done before changes are made to the tax code.  The elimination of these breaks are built into its baseline.

Additionally, there are a lot of tax increases in the Simpson-Bowles plan.  This is necessary to make any large scale dent in the debt.  As a balanced approach, the revenue increases and spending cuts are roughly equal.  The Simpson-Bowles plan also taxes dividends and capital gains as normal income.  This basically results in a huge tax increase for the rich, who hold more of their wealth in stocks and would be taxed more in capital gains and dividends.  Therefore, the Simpson-Bowles plan is able to lower the actual rate while still maintaining equity in taxation.  The Simpson-Bowles plan also significantly cuts deductions for taxes, which allows it to lower some overall rates while still getting revenue increases.  The difference is that people would be paying a higher percentage of their income, because they have less deductions from the baseline rate.

The Simpson-Bowles also recommends raising the gas tax by 15 cents.  While this would undoubtedly hurt some Americans who need gas for travel, work, etc, It could be a much needed revenue booster and a way to get on the right track for green energy.  Americans consume a lot of gasoline, so having a gas tax increase could dramatically increase the revenue into the government's coffers.

We'll have more on tax reform tomorrow.

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