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Debt panel suggests tax changes

By Kay Bell · Bankrate.com
Thursday, November 11, 2010
Posted: 11 am ET

Citing the tough choices that individual Americans have had to make during the recent recession, the bipartisan chairmen of the president's debt reduction panel called for the country's lawmakers to make the same difficult decisions on Wednesday.

"The American people are counting on us to put politics aside, pull together not pull apart, and agree on a plan to live within our means and make America strong for the long haul," wrote Erskine Bowles and Alan Simpson, chairmen of the National Commission on Fiscal Responsibility and Reform.

To that end, their draft report calls for federal budget cuts up to $200 billion a year in domestic and defense spending cuts.

Their proposals to cut Social Security and Medicare are already getting a lot of adverse reactions. But since you're here at a tax blog, let's look at what the debt reduction panel suggests in this area.

The big item is a general, and often expressed, wish: Reform and simplify the tax code. Bowles and Simpson say this could be done by broadening the tax base, lowering tax rates and bringing down the deficit.

They also want to abolish the alternative minimum tax, cut backdoor spending in the tax code, raise the federal gas excise tax and improve taxpayer compliance.

C'mon guys! Give us something hard to do!

My cynical sarcasm aside, I appreciate the call for a simpler tax system.

As for the tax rates, which most of us tend to be most concerned with, the panel suggests we consolidate the current five individual tax brackets into just three and have just a single corporate tax rate.

What the rates would be would depend on which tax breaks, such as the mortgage interest deduction or various child-related tax benefits, were kept or eliminated.

The lowest three individual tax rates would be 8 percent, 14 percent and 23 percent. If some tax breaks were added back, the rates would go as high as 13 percent, 21 percent and 28 percent.

The panel also examines other tax reform proposals that have been floated recently.

The bottom line, though, is that the debt reduction group is in favor of tax reform.

If the final report, due to Congress after at least 14 of the commission's 18 members sign off on it, keeps much of what's in this draft, the recommendations could offer some good starting points to at least begin the tax reform process.

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