Text of the Joint Committee on Taxation’s letter on eliminating major tax expenditures to lower tax rates
Edited by Jenny Jiang
Text of the bipartisan Joint Committee on Taxation’s letter to Sen. Max Baucus (D-Mont.) and Sen. Orrin Hatch (R-Utah) explaining that eliminating major tax expenditures would lower ordinary income tax rates by only 4%:
October 11, 2012
Dear Chairman Baucus and Senator Hatch:
On September 19, 2012, Chairman Baucus convened a meeting of the members of the Senate Committee on Finance to discuss the alternative minimum tax and provisions of the Internal Revenue Code that have either expired over the past year or are about to expire. During that meeting, Chairman Baucus asked what could be said about the concept of repealing all tax expenditures and using all or part of the revenues to reduce statutory marginal rates. I reported the preliminary results of an experiment that I had designed as a preliminary first step towards answering such a question. I promised the Committee members that after my colleagues and I had double checked our work I would provide a written description of the experiment and the results to all of the members of the Committee.
The general approach of the experiment was to assume the repeal of a number of the largest expenditures under the individual income tax as identified in our publication, Estimates of Federal Tax Expenditures for Fiscal Years 2011-2014, (JCS-1-12), and use the resulting revenue raised to reduce the statutory rates of the individual income tax while also repealing the individual alternative minimum tax and the PEP and Pease limitation. The result was to be approximately revenue neutral over the 10-year budget period, 2013-2022.
The experiment would make several changes to present law. These changes include: (a) repealing the individual alternative minimum tax; (b) repealing the overall limitation on itemized deductions and personal exemptions for certain taxpayers; (c) repealing all itemized deductions; (d) taxing capital gains (and dividends) as ordinary income; and (e) repealing the interest exclusion on State and local bonds issued after December 31, 2012. No transition relief would be provided under any repeal.
The itemized deductions, taxing income from capital gain realization at preferential rates, and the interest exclusion on State and local bonds each are large tax expenditure exclusions. Other large tax expenditure provisions that I did not include in this experiment include the earned income tax credit, the child credit, the exclusion of employer provided and self-employed health benefits, and the present law treatment of various forms of retirement and income and pension plans. I did not include health and retirement because of the complexity of the analysis modifying such provisions would require and in the interest of keeping the experiment somewhat simple. Regarding the earned income tax credit and the child credit, for the experiment I assumed that the provisions of EGTTRA and ARRA that modify the earned income tax credit and the child tax credit would be made permanent. There are a significant number of other identified individual income tax expenditures or other possible base broadening policies that I did not include in this experiment.
The Joint Committee staff estimated these changes relative to the present-law baseline. That is, the tax rates for the individual income tax in 2013 and beyond are: 15 percent, 28 percent, 31 percent, 36 percent, and 39.6 percent. There is no “AMT patch” under the present-law baseline and the PEP and Pease provisions are part of the present law baseline. The Joint Committee staff used its conventional modeling to estimate the provisions described above and used the resulting revenues gained over the budget period to estimate an equal percentage decrease for all tax rates on the ordinary income that would make the package roughly revenue neutral for the fiscal year 2013-2022 period. The revenue neutral tax reform package outlined above would permit a four-percent decrease in all ordinary income tax rates. Under the proposal, the individual income tax rates would be: 14.4 percent, 26.88 percent, 29.76 percent, 34.56 percent, and 38.02 percent.
I enclose table #12-2 155 which provides the estimated revenue effects of the different components of the experiment. I also enclose a distributional analysis of this proposal (table #D-12-15). As is the case for the revenue analysis, the distributional analysis compares the policy of the experiment to that of the present-law baseline.
I hope this information is useful. I would be pleased to discuss this material further with you.
Thomas A. Barthold
- Joint Committee on Taxation: Letter to Senate Finance Committee Chairman Max Baucus (D-Mont.) and Sen. Orrin Hatch (R-Utah) on Oct. 11, 2012 (PDF)
- Joint Committee on Taxation: Estimates of Federal Tax Expenditures for Fiscal Years 2011-2015 (PDF)
- WhatTheFolly.com: N.Y. Sen. Chuck Schumer outlines Democrat’s deal to avoid ‘fiscal cliff’
- Analysis: Romney’s tax plan would shift tax burden to middle and lower-income Americans
- VP debate excerpts – Paul Ryan on taxes
- Transcript: Debate excerpts – Mitt Romney on his tax policies
- Transcript: Debate excerpts – President Obama on Romney’s tax plan
- Transcript: Debate excerpts – Mitt Romney on reducing the deficit