Advancing a Free Society

Double Taxation in Bowles-Simpson Tax Reform Plan Vitiates Lower Tax Rate

Friday, December 3, 2010

Erskine Bowles and Alan Simpson released their revised report, entitled “The Moment of Truth,” on December 1, 2010.  Section II deals with tax reform.

Most tax reform plans aim to broaden the tax base by eliminating tax expenditures (deductions, exemptions, credits) and lowering marginal tax rates.  Bowles-Simpson fits this mold.  The illustrative fully phased in individual and corporate tax reform plans appear in figures 7 and 9.

The individual plan calls for three brackets of 12%, 22%, and 28%; the latter is a reduction from the current top marginal rate of 35% or 39.6% if the Bush rate reductions are permitted to expire on December 31, 2010.  Lower rates reflect the elimination of itemized deductions and reductions in the tax benefits of employer provided health care insurance, mortgage interest, and charitable giving.  Taxes would rise on capital gains, dividends, and interest (municipal bonds), which are treated as ordinary income.  (Other details are discussed in the report.)

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