NAIFA GovWatch

Deficit Reduction Commission Chairmen Release Tax Reform Plan

Issue: Tax Reform

Date: November 11, 2010

Action Taken: On November 10, the two co-chairs of the President’s National Commission on Fiscal Responsibility and Reform (the deficit reduction commission) released a comprehensive plan to reduce the deficit by about $100 billion each year for the next five years.

Click here to read the 50-page proposal, which includes charts and bullet points of the proposal’s various elements, but is light on important implementing detail

Three Part Plan: The chairmen’s mark includes plans to: cut discretionary spending (including Defense) amounting to almost $10 trillion by 2020; reform the U.S tax system to generate tax revenues amounting to 21 percent of gross domestic product (GDP); reform Social Security and Medicare.

Here are some of the elements of the draft plan that will impact the business of NAIFA members and the financial security status of their clients:

Tax Reform: The chairmen’s proposal includes three options (one of which itself contains four options). All three would repeal the alternative minimum tax, and would tax capital gains and dividends as ordinary income. They are:
- “The Zero Plan:” This option would eliminate (or drastically reduce) the number of deductions, exemptions and exclusions from the current income tax system. There are four possibilities, as follows:
  - Eliminate all tax expenditures including tax deferred life insurance and annuity inside buildup, most employer-provided benefit programs, employer contributions to retirement savings plans, and popular deductions like the one for mortgage interest; and reduce the number of tax brackets from the six in current law to only three. The lower income tax rates would be eight percent, 14 percent and 23 percent. The corporate rate would be 26 percent.
  - Eliminate all tax expenditures except the child tax credit and the earned income tax credit (EITC). The resulting rates would be nine percent, 15 percent and 24 percent. The corporate rate would be 26 percent.
  - Eliminate all tax expenditures except the child tax credit and the EITC, and also “reform” – “at 80 percent of current levels” (details missing) mortgage, health and retirement benefits—under this proposal the three income tax brackets would be 12 percent, 20 percent and 27 percent. The corporate rate would be 27 percent.
  - Eliminate all tax expenditures except the child tax credit, the EITC, and current mortgage, health and retirement benefits. Rates under this plan would be 13 percent, 21 percent and 28 percent. The corporate rate would be 28 percent.
- “Wyden-Gregg” Style Reform: This is a base-broadening, rate-reducing plan that would establish three income tax brackets of 15 percent, 25 percent and 35 percent. It would increase the standard deduction to $30,000 (married)/$15,000 individuals. It would not directly tax life insurance and annuity inside buildup (at least not at the non-detailed level of explanation in the proposal). But it would cap the exclusion from income tax for the value of employer-provided health insurance, limit the charitable deduction and mortgage interest deduction; and repeal deductions for cafeteria plans, among others.
- “Tax Reform Trigger:” The third option would require the House Ways and Means and Senate Finance Committees, working with the Treasury Department, to craft a comprehensive tax reform plan by 2012. If that fails, an across the board “haircut” (reduction in deductions, the employer-provided health insurance exclusion, and general business tax credits) would automatically kick in by 2013. Each year thereafter that tax reform is not enacted, the “haircut” would increase.
Entitlements (Social Security/Medicare et. al.) Reform: The plan also suggests increasing the Social Security retirement age, increasing the wage base, means-testing Social Security benefits, changing (reducing) the cost-of-living adjustment mechanism, and building in increased flexibility in terms of when (and how much) retirees can take their Social Security benefits. The chairmen also suggest cuts in Medicare.

Next Steps: Initial response is guarded. At the unveiling meeting, members of Congress from both parties who serve on the Commission gave kudos to the chairmen, former Clinton White House chief of Staff Erskine Bowles and former Republican Senator Alan Simpson. But, several said that while the proposal is “serious,” they cannot support it in its current form.

The Commission will vote on a plan—which may or may not be the chairmen’s recommendations unveiled yesterday, at their next public meeting, November 30. They will send their report to Congress by December 1. Most insiders believe there will not be a majority, much less the required super majority of 14 of the 18 commissioners, to turn the report into a recommendation.

NAIFA will watch these developments closely. Certainly the chairmen’s proposal as drafted would likely diminish the market for life insurance, annuities and employer-provided benefit programs. At the moment it appears chances are good that these proposals will not get the “super majority” vote by the commissioners that will require Congress to vote on them. In the meantime, the response has been tepid so far from key lawmakers in Congress. But ideas (both positive and negative) tend to take on a life of their own in Washington. NAIFA members can expect the ideas contained in the chairmen’s recommendations to be around for a long time.

NAIFA Staff Contact: Michael Kerley, Senior Vice President - Federal Government Relations; or Diane Boyle, Vice President - Federal Government Relations; or Jill Edwards Hoffman, Assistant Vice President - Federal Government Relations; or Dani Kehoe, NAIFA Outside Counsel.

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