By Jeremy Scott
It might be the 10-year anniversary of President George W. Bush's President's Advisory Panel on Federal Tax Reform issuing its final report, but there is a more recent tax policy anniversary coming up. On November 10, 2010, President Obama's National Commission on Fiscal Responsibility and Reform (more commonly called the Bowles-Simpson commission, after the two co-chairs) released it's chairmen's mark -- a draft proposal that was later the group's final recommendation. Much like the Bush group's proposals, the Bowles-Simpson plan fell largely on deaf ears, but the chairmen's plan contains a few interesting components that policymakers would be wise not to disregard completely.
In some ways, the Bowles-Simpson plan is very dated. It was drafted mostly as a way to combat the out-of-control deficits of Obama's first years in office, largely caused by a bloated stimulus bill and falling tax receipts. The goal of the plan was less to overhaul the tax system and more to create a pathway to fiscal sustainability. Therefore, the focus was on $4 trillion of deficit reduction. That number was achieved by $1.6 billion in discretionary spending cuts, about $1 trillion in new revenue, and some changes to Medicare and Social Security. A grand deficit reduction deal like this is not really a high priority anymore. While deficits are still historically high, they have fallen from $1.4 trillion in 2009 to about $400 billion in 2015 because of the sequester deal and a slow, but steady, economic recovery.
Bowles-Simpson might have been about deficit reduction, but it had a healthy tax component. Basically, the chairmen's preferred option was to eliminate all tax expenditures (save the earned income tax credit, the child credit, the foreign tax credit, and a few others), consolidate the individual rate structure into three brackets (9 percent, 15 percent, and 24 percent), lower the corporate rate to 26 percent, raise the gas tax, and tax all capital gains as ordinary income. The elimination of popular tax expenditures like the mortgage interest deduction, the exclusion for employer-provided healthcare, and preferences for retirement accounts made the plan unacceptable to many Republicans, while Democrats decried the fact that a deficit reduction plan was still trying to lower rates on both the wealthy and corporations.
As a tax reform plan, Bowles-Simpson has been superseded by former House Ways and Means Chair Dave Camp's H.R. 1, which also hasn't garnered much support. But Camp didn't really consider the most interesting part of the 2010 proposal: the elimination of the preference for capital gains. The idea of taxing capital gains as ordinary income has been anathema to Republicans, but the recent upswing of populism in both parties means the preference might not be as sacred as it once was. Republican presidential candidates like Donald Trump and Texas Sen. Ted Cruz have taken aim at preferences like carried interest. And there is a tinge of anti-Wall Street sentiment in the Tea Party movement.
Repealing the preference would raise a lot of revenue ($700 billion over 10 years, with another $230 billion if you also got rid of the dividend preference). It actually would mostly target high-income taxpayers, meaning that it would combat the rising inequality Democrats rail about but never really confront. (Many Democratic tax proposals to raise individual rates would actually hit the upper middle class much more than the truly wealthy.)
Does this mean that a repeal of the preference is likely anytime soon? Almost certainly not. But this is the one element from the Bowles-Simpson plan that policymakers should continue to think about. Combined with a lowering of overall rates, eliminating the preference would probably produce a tax system that is both more progressive and a lot simpler.