Thursday, November 11, 2010

Obama Deficit Commission Leaks Recommendations - Surprising Tax Rate Reduction

Yesterday, Obama's Deficit Commission leaked some of their proposed recommendations.

The Deficit Commission is bi-partisan group created by President Obama to come up with recommendations on how on to reduce (and presumably eliminate) deficit spending over the next decade. The commission's members were appointed by the President as well as the Democrat and Republican leaders in the House and Senate. Some of the GOP's rising stars, including Congressman Paul Ryan and Senator Tom Coburn, are members of the commission.

The draft proposal calls for cutting $4 trillion from the projected deficits over the next 10 years. Nancy Pelosi, Congressman Rick Weiner, and many others on the left immediately declared the draft as unacceptable. To date, most Republicans have had a more cautious reaction.

The spending cuts in the commission's report aren't even close to being deep and broad enough to balance the budget in 10 years. They didn't touch Obamacare because the members had "healthcare fatigue" after last year. They are waiting too long (2075) to make very minor changes to Social Security. They don't do much about spending in the Departments of Agriculture, Commerce, Eduction, Energy, and Labor. Yes, they are proposing to close 1/3rd of U.S. overseas military bases and bravo to them for that. But, the proposal will NOT balance the budget in 10 years. They need to propose more to be credible.

However, their tax proposals are much more interesting.

Obama's deficit commission proposes to reduce the top income tax rate to 23%. That's a 36% cut from the current 36% top rate and a 42% cut from 39.6% (where the rate will be if the Bush tax cuts expire). It would also collapse the current six income tax rates (10, 15, 25, 28, 33, 36) to three rates (8, 14, and 23). Plus it eliminates the alternative minimum tax and cuts corporate tax rates. The U.S. currently has the second highest corporate tax rates in the world. Obama's commission proposes to reduce the top corporate tax rate from 36% to 26%.

Mostly, they propose to "pay for it" by eliminating deductions.

The GOP has wanted to flatten rates and eliminate deductions for 30+ years. Reagan did this twice -- once at the beginning of 1980s when the top rate was cut from 70% to 50% -- and again in 1986 when President Reagan teamed up with Democrat Senator Bill Bradley to cut the top rate from 50% to 28%, while eliminating deductions.

One deduction Obama's commission wants to eliminate is the deduction for jumbo mortgage loans over $500,000. Subsidizing consumption at the expense of innovation and production (including the purchase of expensive homes) is not the right thing to do if we want to have a healthy, competitive, economy. But this is exactly what the current U.S. tax code does. Of course, people certainly should be able to buy a million dollar plus home if they can afford it, but the tax code shouldn't subsidize consumption over innovation and production.

The commission's report is very mixed. On the one hand, it demonstrates cowardice because they propose to wait until most of us are dead to fix Social Security. On the other hand, it demonstrates some courage given that they were created by a Democrat President and still propose to dramatically reduce income tax rates, including rates on the "rich". Overall, I am actually encouraged by this report. But they need to do a lot more on spending.

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