Tax Analysts Blog

A Look Back at the Most Interesting Part of Bowles-Simpson

Posted on Nov 5, 2015

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As a tax reform plan, Bowles-Simpson has been superseded by former House Ways and Means Chair Dave Camp's H.R. 1, which also hasn't garnered much support.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.

Read Comments (1)

MIKE55Nov 10, 2015

I'd agree that repealing the capital gains preference is the least painful way
to pay for lower rates. I don't agree that lower rates with a broader base is
the correct goal for tax reform, but seem to be part of a dwindling minority on
that point (the proponents of incentivizing capital investment over rate cuts
seem to have mostly disappeared), so your idea makes a lot of sense.
In terms of your point about Democrats not confronting wealth inequality: it's
not surprising, because I don't think curbing wealth inequality is a goal for
the core members of the party. In my experience, the majority of Democrats are
people who think increased government spending is the best way to raise the
standard of living in the U.S., which is their end goal.* Priorities include
things like providing free health care, building new infrastructure, taking
care of the elderly, creating better schools, etc. None of that does much to
decrease wealth inequality.
The problem for Democrats is that the upper middleclass and "sorta rich" have
all the income, but are already heavily taxed relative to both those who make
less than they do AND those who make more than they do (the federal tax burden
is very progressive up to about ~$5M of annual income, at which point ETRs
start to drop). Presumably someone clever at the DNC realized the solution to
this problem was to shift the rhetoric to wealth inequality, while at the same
time avoiding discussions about the actual federal tax burden distribution like
the plague.
*I understand there is a subset of the Democratic party focused on ending
wealth inequality that gets a ton of media attention. However, I think it'd be
fair to characterize this subset as "loud but small." I guess we'll find out
soon.....Bernie Sanders seems to be the champion of this group, so we'll see
how well he ends up doing against his center-left opponents.

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