Tax Reform, According to the Gang of Six

The most important part of the senators’ debt reduction proposal – tax reform – is without question a little absurd. How will the government raise $1 trillion in new revenue and, at the same time, cut taxes by $1.5 trillion? Something felt wrong to me when the New York Times awkwardly quoted President Barack Obama as saying, “We have [an] administration that is prepared to sign a package that includes spending cuts” while also providing new revenues, Mr. Obama said. Note the lack of quotation marks around the phrase “providing new revenues.” I continued to search the news for a clear explanation of how these anticipated revenues would be created.

My aha-moment finally came earlier this afternoon. Apparently, there is a yes and/or no answer to the question: “Does the bi-partisan tax proposal offered by the Gang of Six raise taxes?” The no answer goes as follows. The tax brackets will be decreased to three (from the current five) and the percentages allotted to each bracket will be reduced. For example, the highest of the top tax bracket will decrease from 35% to 29%. I hope I am correct in assuming that is a tax break. So, where do these gangsters expect to get their moolah from?

Under the senators’ proposal, the Senate Finance Committee (their jurisdiction includes taxation and IRS oversight) would be directed to eliminate the Alternative Minimum Tax (apparently, this type of tax is notorious for placing undue burden onto working families and small businesses), while devising a plan to reform tax breaks on health care, charitable giving, and home-ownership. So, if I get sick and have to pay a lot of money for medical care, I would not be getting a tax break for it. Or, if I finally decided to buy a home, I would not receive a tax credit. Finally, I would not be rewarded if I were rich and decided to give to the [insert marginalized group here]. Oh, and let us not forget the proposed territorial tax reform, where transnational companies will only be required to pay taxes on income made outside the U.S. Don't get me wrong, I actually find this a great idea, but could the same be extended to the growing number of multinational individuals who are forced to pay taxes on any money made outside U.S. territory? Don't worry; I will refrain from discussing how corporations have hijacked the 14th Amendment.

Regardless, it is painfully obvious who will benefit from these reforms. Therefore, how can Obama endorse this proposal without going back on his pledge to increase taxes? David Wessel, in his Wall Street Journal article, uses the term yardstick to explain this conundrum. Basically, the White House uses a different baseline in their calculations of future gains, which allows them to assume that the government will be able to raise $1 trillion in revenue over 10 years.

Conversely, there may be some good news. Tuesday, House Republicans passed legislation not only on deep spending cuts, but also on a constitutional amendment requiring a balanced budget.

Generally, I do not believe congressional leaders will allow our debt to default. But, it is important not to hastily make decisions when faced with a looming deadline. The fact that our tax rates could revert back to Reagan levels with a democratic president is a little confusing. Please let me know if my evaluation of the proposed tax reforms is incorrect; I would feel much better if that were the case.

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