A budget resolution held out as a “centrist” alternative to the Ryan budget plan is claimed to be based on the recommendations of the President’s fiscal commission (often called the Simpson-Bowles commission, after its co-chairs) but actually maintains the regressive capital gains break that would have been eliminated under the commission’s plan.
A recent report from CTJ finds that ending the tax preference for capital gains would raise more than half a trillion dollars over a decade and that 80 percent of the resulting tax increase would be borne by the richest one percent of taxpayers.
The plan proposed by the Simpson-Bowles commission in 2010 to reduce the budget deficit offered several alternatives to reform the tax code, all of which would eliminate the tax preference for capital gains. There is, in fact, a note under the table on page 29 of the commission’s plan saying each alternative, regardless of rates, “taxes capital gains and dividends as ordinary income.”
In stark contrast, the so-called centrist budget resolution that was introduced Monday specifically calls for "lowering individual and corporate income tax rates across-the-board with the top rate reduced to between 23 and 29 percent unless the top rate must be higher than 29 percent to offset preferential treatment for capital gains." (Italics added.)
The co-sponsors of this resolution include Reps. Jim Cooper (D-TN) Steve LaTourette (R-OH), Kurt Schrader (D-OR), Charlie Bass (R-NH), Mike Quigley (D-IL) and Tom Reed (R-NY).
Tax Reform Requires Taxing All Income at the Same Rates — as Reagan’s Did
It is virtually impossible for Congress to pass a fundamental tax reform that sweeps away tax loopholes and tax subsidies, and does so in a progressive way, without eliminating the tax subsidy that is most targeted to the rich — the capital gains tax preference.
The last major tax reform, signed into law by President Reagan in 1986, did exactly this, resulting in a personal income tax that applied the same rates to all types of income. This greatly simplified taxes and eliminated the incentive to engage in tax shelters to convert other types of income into capital gains in order to take advantage of lower income tax rates.
Simpson-Bowles Plan Was Poor Policy Even Before House “Centrists” Inserted Capital Gains Tax Preference
Even though it would have ended the capital gains tax preference, the Simpson-Bowles commission’s plan was deeply flawed and unfair for many other reasons. Chief among them, it relied on spending cuts to meet two-thirds of its deficit-reduction goal and relied on new revenue to meet just one third of that goal.
When the Simpson-Bowles plan was made public, CTJ criticized the fact that it would close tax loopholes and tax subsidies but would use most of the resulting revenue savings to reduce tax rates rather than reducing the budget deficit (which was the point of the commission, after all).
Another major problem with the plan is its call for a “territorial” tax system, which the “centrist” House budget resolution echoes. A “territorial” tax system is a euphemism for exempting the offshore profits of U.S. corporations from the corporate income tax.
Photo of Barack Obama meeting with Alan Simpsons and Erskine Bowles via White House Creative Commons Attribution License 2.0