Final Report of President Obama's Deficit Reduction Commission

Dec 03, 2010

I.  Introduction

Today, the President’s National Commission on Fiscal Responsibility and Reform approved its final report proposing a number of tax and other revenue increases and spending cuts.1  The vote was 11 out of 18 in favor, which was fewer than the 14 votes that Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi had required for a vote by Congress.  Nevertheless, because the report had bipartisan support, it is expected to be influential.

The report follows an earlier, similar, draft report circulated by the co-chairs of the commission, Senator Alan Simpson and Erskine Bowles, on November 10,2 and a third report written by The Debt Reduction Task Force of the Bipartisan Policy Center, which was co-chaired by Senator Pete Domenici and Dr. Alice Rivlin, which was issued on November 19.3  This memorandum discusses the revenue raising aspects of the three reports.

A.  Overview of the Final Proposal:

Individuals

In short, the Final Proposal would:

  • Reduce the number of individual tax brackets from six to three, and would increase the lowest bracket from 10% to 12%, but reduce the 25% and 28% brackets to 22% and the 35% bracket to 28%.
  • Replace the mortgage interest deduction with a 12% non-refundable tax credit that is limited to interest on mortgages up to a $500,000 principal amount and only on primary residences.
  • Replace the charitable deduction with a 12% non-refundable tax credit that would be available only to the extent contributions exceed 2% of a taxpayer’s AGI.
  • Tax the premiums on employer-provided health care insurance beginning in 2018, but reduce the 40% excise tax that will apply to “Cadillac plans” beginning in 2018 to 12%.
  • Repeal the exemption for interest on newly-issued state and municipal bonds. 
  • Consolidate the various types of qualified retirement plans (such as 401(k), 403(b), IRA, Roth IRA, HR10, and profit-sharing plans) into a single retirement plan and limit the tax-exemption for contributions to the lesser of 20% of income or $20,000.
  • Eliminate virtually all other tax credits, deductions and exclusions.
  • Repeal the AMT.
  • Increase the long-term capital gains rate (maximum of 15% under current law) and the qualified dividend rate (maximum of 15% under current law) so that they are the same as the ordinary income rate (i.e., maximum rate of 28%).
  • Increase the federal excise tax on gasoline by $0.15/gallon from $0.183/gallon to $0.333/gallon, an increase of 81.5%.

Social Security

The Final Proposal would:

  • Increase the cap on the portion of wages subject to Social Security tax by 2020, from approximately $106,800 under current law to $190,000.
  • Raise the retirement age from 66 to 68 by 2050 and 69 by 2075.
  • Reduce Social Security benefits for higher earners.
  • Possibly tax Social Security benefits (although this is unclear).

Corporations

The Final Proposal would:

  • Reduce the highest marginal corporate rate to 28%.
  • Eliminate the domestic production deduction, last-in first-out (LIFO) method of inventory accounting, accelerated depreciation, and all other all business tax credits and other tax expenditures.
  • Exempt from tax all active foreign-source income earned by foreign subsidiaries (rather than merely defer it, as under current law), but retain the current subpart F rules that require current taxation of all passive foreign-source income earned by foreign subsidiaries.

B.  Similarities and Differences Between the Three Proposals

Individuals

  • Each of the proposals compresses the number of tax brackets and reduces marginal tax rates but, at the same time, each proposal also significantly limits or entirely repeals most deductions, exemptions and credits.  Each of the proposals also increases the overall taxpayer tax burden; this increased burden is borne disproportionately by taxpayers earning over $250,000.  However, under each of the proposals, some taxpayers in the lowest bracket would see tax increases and some of the top 0.1% income-earners would see tax decreases.
  • Each of the proposals repeals the alternative minimum tax (the “AMT”).  However, each of the proposals also incorporates elements that resemble the AMT in significant respects.
  • Each of the proposals increases the long-term capital gains rate so that it is equal to the ordinary income rate (i.e., maximum long-term capital gains rate increased from 15% to 28%).
  • The Final Proposal, but not the Domenici-Rivlin proposal, would repeal the exemption for interest on newly-issued state and municipal bonds.
  • Only the Domenici-Rivlin Proposal would introduce a national sales tax and a tax on sugar sodas and juice; the other proposals would not introduce a sales tax, VAT, or other consumption tax. 

Social Security

  • Each of the proposals generally increases the cap on the portion of wages subject to Social Security tax to 90% of national wages.4  Each of the proposals reduces payments to high-earning beneficiaries by 2050. 

Corporations

  • Each of the proposals dramatically reduces the highest marginal corporate income tax rate (from 35% under current law to 26-28%), and each of the proposals meaningfully reduces or repeals the tax benefits available to corporations (including the domestic production deduction, LIFO method of inventory accounting, energy tax preferences, and accelerated depreciation). 
  • The Final Proposal would convert the U.S. international tax regime into a territorial system that would exempt active foreign income from tax, but the Domenici-Rivlin Proposal would leave the international tax regime as it is (and merely defer the tax until the earnings are repatriated).

Comparison of the Proposals


Current Law

Final Proposal5

Co-Chairs’ Proposal6

Domenici-Rivlin Proposal

 

Individuals

 

 

 

 

 

Tax Rates

6 brackets from 10%-35%

(15%-39.6% if the Bush tax cuts expire)

12%, 22%, 28%

1) 8%, 14%, 23%7
2) 9%, 15%, 24%
3) 12%, 20%, 27%
4) 13%, 21%, 28%

15%, 27%



Personal Exemption and Standard Deduction

$3,650 personal exemption;8 $5,700 standard deduction

Retained9

Repealed

Replaced with an earnings credit equal to 21.3% of the first $20,300 of earnings plus a credit of 15% of the standard deduction for social security beneficiaries

 

Alternative Minimum Tax

28% of “alternative minimum taxable income”

Repealed

Repealed

Repealed

 

Dividend Tax Rate

Maximum rate 15% (20% if the Bush tax cuts expire)

Increased to ordinary income rates

Increased to ordinary income rates

Increased to ordinary income rates

 

Capital Gains Tax Rate

Maximum rate 15% (39.6% if the Bush tax cuts expire)

Increased to ordinary income rates

Increased to ordinary income rates

Increased to ordinary income rates (first $500 of gains/losses excluded)10

 

Child Tax Credit

$1,000 per child

Retained

Repealed under version 1; retained under versions 2-4

Replaced with $1,600 per child "universal child credit"


Earned Income and Other Credits

Maximum $5,666 for EITC11

EITC retained; all other credits repealed

All credits repealed under version 1; versions 2-4 retain EITC only

EITC replaced with $4,324 (maximum) per worker "earnings credit";12 all others repealed

 

Mortgage Interest Deductions; Exclusion of Gain from Sale of Primary Residence

Limited to interest on $1.1 million principal amount13

Replaced with a 12% non-refundable tax credit for interest on up to $500,000 principal residence mortgage

Mortgage interest deduction repealed under versions 1 and 2; reduced under version 3; retained under version 414

Mortgage interest deduction replaced with 15% credit for up to $25,000 interest/year; gain exclusion retained

 

Deduction for Contributions to Qualified Retirement Plans

Contributions to plans exempt, subject to limits based on type of plan15

Tax-deferred contributions capped at the lower of 20% of annual income or $20,000

Repealed under versions 1 and 2; version 3 reduces by 20%; retained under version 4

15% refundable credit on contributions, capped at the lower of 20% of annual income or $20,00016


Exclusion for Employer-Provided Health Care

100% of premiums paid by employers is excluded from employees’ income17

Excise tax reduced to 12%; exclusion phased out for all premiums by 2028

Repealed under versions 1 and 2; reduced to 80% under version 3; retained under version 4

All premiums over $27,400 (family) included in regular income; 100% included by 2038

 

State and Local Income and Real Property Tax Deduction

“Above-the-line” deductions
(unlimited)

Repealed

Repealed

Repealed

 

Tax-Exempt Interest on State and Municipal Bonds

Interest exempt from income

Repealed for newly-issued bonds

Repealed

Retained


Charitable Contribution Deduction

Deduction generally limited to 50% of taxable income

12% non-refundable tax credit available only for deductions in excess of 2% of AGI

Repealed18

15% refundable tax credit (payable to charity)

 

Miscellaneous Itemized Deductions

Deductible only to the extent they exceed 2% of AGI19

Repealed

Repealed20

Deductible only to the extent they exceed 5% of AGI21

 

Indexation for Inflation

Only standard deduction

Modify standard deduction indexation to adopt “chained CPI”

Modify standard deduction indexation to adopt “chained CPI”

Yes
(indexed to CPI)

 

3.8% Medicare Tax on Investment Income

Starts in 201222

Silent

Silent

Silent

 

Value Added Tax/National Sales Tax

None

None

None

6.5% "debt-reduction sales tax"

 

Gasoline Tax

$0.183 per gallon

$0.333 per gallon

$0.333 per gallon

None

 

Soda/Alcohol Tax

No tax on sugar sodas; roughly $0.21/oz excise tax on pure distilled alcohol

None

None

$0.01/oz excise tax on sugar sodas and juice

$0.25/oz excise tax on alcohol


Social Security

Tax on employers and employees: 6.2% capped at $106,800 of wages; 1.45% unlimited

Increase payroll tax wage cap to 90% of national wages by 2050; “consider” one-year payroll tax holiday in 2011

Increase payroll tax wage cap to 90% of national wages by 2050

Increase payroll wage cap to 90% of national wages by 2050; one-year "payroll tax holiday" in 2011;
Social Security benefits fully taxable subject to credit equal to 15% of standard deduction

 

Estate Tax

No estate tax in 2010; in 2011, top rate of 55% and $1 million exemption

No proposal

No proposal

Top rate of 45%; $3.5 million exemption

 

Corporations

 

 

 

 

 

Corporate Tax Rate

35%

28%

26%

27%

 

Domestic Production Deduction, LIFO for Inventory, General Business Credits and Other Tax Expenditures

In effect

Repealed

Repealed

Repealed, except retains research and experimentation (R&F) tax credit

 

International Tax System

Worldwide system

Territorial system (exempt active foreign income); retain current system for passive foreign income

Versions 1 and 2 retain worldwide system; versions 3 and 4 establish a territorial system

Retains current worldwide system

 

The balance of the memorandum discusses, compares, and contrasts the proposals.  Part II discusses the proposals affecting individuals (including the individual income tax, national sales tax, and social security proposals).  Part III discusses the corporate income tax proposals.

II.  Proposals Affecting Individuals

A.  Tax Rates

Income

Rates

Individual

Head of Household

Married

Current Law

2011

Final Comm’n

Co-Chair

Domenici-Rivlin

 

 

 

 

 

 

 

 

< $8,375

< $11,950

< $16,750

10%

 

15%

 

12%

 

8%-13%

 

 

15%

$8,375

$11,950

$16,750

15%

$34,000

 

$45,550

$68,000

 

25%

 

28%

 

 

22%

 

 

14%-21%

$51,000

$102,000

$82,400

$117,650

$137,300

28%

31%

 

27%

$171,850

$190,550

$209,250

33%

36%

$373,650

$373,650

$373,650

35%

39.6%

28%

23%-28%

1.  Table of Current and Proposed Tax Rates

 

 

2.  Commentary

Each of the proposals compresses the number of income tax brackets and reduces the highest marginal tax rates.  The reduction in tax rates creates the appearance of a tax cut.  However, as discussed in the next section, because the proposals repeal or limit a number of deductions, exemptions, and credits, each proposal significantly increases overall taxes for many taxpayers.

B.  Personal Exemption; Standard Deduction; Mortgage Interest Deduction; State and Local Tax Deduction; Charitable Contribution Deduction; Miscellaneous Itemized Deduction

1.  Current Law

Under current law, federal income tax is based on “taxable income.”23  Taxable income is equal to:

“Gross income”24

“recognized income” from all sources, excluding (i) unrealized appreciation, (ii) gifts, (iii) death benefits paid under a life insurance contract, (iv) tax-exemption interest, (v) employer-provided health insurance, (vi) employer-provided pension contributions, and (vii) certain other employer-provided benefits;

minus

(i) trade-or-business deductions, (ii) allowable losses from the sale or exchange of property, (iii) deductions attributable to rents and royalties, (iv) contributions to pensions and other retirement plans, (v) alimony payments, and (vi) moving expenses;25

minus

personal exemption ($3,650 per person, including spouse and dependents);26

minus

either the standard deduction ($5,700 for single individuals, $8,400 for single “heads of household,” or $11,400 for married couples filing jointly), or

“itemized deductions,” such as (i) state and local income taxes, (ii) real property and certain personal property taxes, (iii) home mortgage interest,27 (iv) charitable contributions, (v) investment interest expense, (vi) medical expenses (in excess of 7.5% of AGI).28

2.  Overview of the Effect of the Proposals on Individuals

Each of the proposals repeals or significantly limits many of the exclusions, deductions and credits that are currently available to reduce taxable income.

Over the eight-year period between 2012 and 2020, the Final Proposal would raise $996 billion, the Co-Chairs’ Proposal would raise between $871 billion and $1.1 trillion, and the Domenici-Rivlin Proposal would raise $2.308 trillion in new tax revenues.29

This revenue arises principally from the repeal or reduction of tax credits, deductions, and exemptions (and, in the case of the Domenici-Rivlin Proposal, the imposition of a 6.5% national sales tax). 

Some of the likely consequences from the repeal or reduction of the various credits, deductions, and exemptions include:

  • The repeal of the deduction for state and local taxes will adversely affect taxpayers in high-tax states, such as New York and California. Legislators from these states would be expected to oppose the proposals for this reason.
  • The repeal of the exemption for interest on state and municipal bonds will dramatically increase the borrowing cost for states and municipalities.30  Local legislators would be expected to oppose this proposal.
  • The reduction in the charitable contribution deduction for high-income taxpayers will cause a dramatic increase in charitable giving in the year before the proposal is effective, and will adversely affect charitable giving at the higher-bracket levels after enactment.  Religious groups, colleges and universities, and other non-profit groups would be expected to oppose the proposal on these grounds.
  • The significant reduction in mortgage interest deductions will adversely affect residential real estate prices and will have political implications for passage.  If existing mortgages are not grandfathered, existing houses may be unaffordable for many taxpayers.
  • If the deduction for contributions to 401(k) and other retirement plans is replaced with a 12-20% refundable tax credit (capped at $20,000), retirement savings for taxpayers in the higher brackets can be expected to  decline, and some taxpayers who contribute pre-tax earnings to retirement plans will be subject to tax without the cash to pay the tax.31
  • A repeal of the exclusion for life insurance death benefits (and of the inside build up) will be fiercely opposed by the life insurance industry and will represent a hardship for many heirs unless existing contracts are grandfathered.32

The Urban-Brookings Tax Policy Center estimates that, under the Final Proposal, taxpayers across the board will see tax increases, but the top quintile and top 0.1% will see the greatest increase.33

However, the Tax Policy Center’s estimate may significantly overstate the tax increase to the top 0.1% of earners.  It appears that the Tax Policy Center merely took a snapshot of the tax returns of the 0.1% highest-earning taxpayers and applied the proposals to those taxpayers.  These taxpayers had a disproportionate amount of capital gains.  Because the Final Proposal would increase the capital gains rates, and the Tax Policy estimate simply assumed that these taxpayers would recognize an equal amount of capital gains after the proposal is enacted, the Tax Policy Center’s estimate assumes that these taxpayers will pay more capital gains tax.  This assumption is incorrect. 

Many of the highest-income taxpayers would see dramatic tax cuts under the proposals.  If the proposals are enacted, many of the taxpayers who had sold their capital gains assets when the tax was imposed at 15% will defer the gains when the rate is 28%.34  (High-income taxpayers with appreciated publicly-traded securities have the ability to hedge their risk and borrow against the securities without recognizing the capital gain.35)  Accordingly, many of the highest-income taxpayers will see dramatic tax cuts under the proposals.

The effect of the proposals for a high-income couple can be illustrated with the following example:

High-Income Example. A married couple lives in New York City, has no children, and earns $10 million of ordinary income.  The couple pays New York State and City taxes of $1,261,800.36  Under current law, the couple has taxable income of $8,730,900 ($10 million - $7,300 personal exemptions - $1,261,800 state and local taxes) and a federal income tax liability of $3,055,815 ($8,730,900 x 35%).37

Under the Final Proposal, the couple would have a tax liability of $2,794,764,38 $261,051 less than under current law (an 8.5% tax cut).  If the couple lived in Florida (which has no state tax), under current law, the couple’s federal income tax liability would be $3,497,445,39 but under the Final Proposal, their tax liability would still be $2,794,764,40 which is a tax cut of 20.1% ($702,681).

Under the Domenici-Rivlin Proposal, if the couple lived in New York City, their federal tax liability would be $2,695,676.41  Thus, the couple would pay $360,139 less income tax under the Domenici-Rivlin proposal than under current law (an 11.8% decrease).  After federal and state taxes, the couple would be left with $6,042,524 ($10,000,000 - $2,695,676 federal tax liability - $1,261,800 state and local tax liability).  If the couple spends all of this after-tax income, under the Domenici-Rivlin proposal, the couple would pay an additional $392,764 in deficit reduction sales taxes (6.5% x $6,042,524).  In this (unlikely) case, the couple’s total federal tax liability would be $3,088,440, which is $32,625 more than under current law (a 1.1% tax increase).  

If the couple lived in Florida, under the Domenici-Rivlin Proposal, the couple would pay $2,695,676 in federal tax,42 or $3,170,457 if they spent all of their after-tax income.43  Thus, under the Domenici-Rivlin Proposal, they would see a tax cut of between $326,988 (if they spend all of their income) and $801,769 (if they spend none of their income) (representing a tax cut of between 9.4% and 22.9%).

Thus, the couple would almost always be better off under the proposals (and sometimes significantly so).44  The only situation where the couple would be worse off is under the Domenici-Rivlin Proposal if they lived in New York City and spent all of their after–tax income (and even then, they would be only minimally worse off).

The effect of the proposals for a low-income taxpayer can be illustrated with the following example:

Low-Income Example.  A married couple has no children and earns $35,400.45  Under current law, their federal tax liability is $1,670,46 leaving them with an after-tax income of $33,730.

Under the Final Proposal, the couple’s tax liability would be $2,004,47 a tax increase of $334 (20%) over current law.48

Under the Domenici-Rivlin Proposal, the couple’s tax liability would be $986,49 a tax cut of $684 (41%) compared to current law.50  The couple would have $34,414 after the tax.  However, in the very likely scenario that the couple spends all of their after-tax income on goods and services, they would pay a “debt reduction tax” of $2,237 and have a total tax liability of $3,223.51  Thus, the couple would have a federal tax increase of $1,553, or 93%, as compared to current law.52  Thus, under the Final Proposal, the low-income couple is worse off.  Under the Domenici-Rivlin proposal, the couple is better off in the unlikely scenario that they spend less than $10,523.07 on goods and services; otherwise, the debt-reduction tax wipes out their income tax savings.53

Despite the fact that in these examples the high-income couple almost always sees a tax cut and the low-income couple almost always sees a tax increase, each of the proposals do contain elements that could be used to construct a progressive tax system.  First, and most importantly, each of the proposals convert deductions into refundable credits.  This change allows low-income taxpayers to benefit from deductions to the same extent as high-income taxpayers.  Second, the Domenici-Rivlin Proposal would increase the exemption for individuals and require fewer taxpayers to file tax returns than under current law.54

The balance of this Part II discusses the specific elements of the proposals in greater detail.

C.  The Earned Income Credit; Child Care Credit, and Other Tax Credit Programs

1.  Current Law

Earned Income Credit.  Under current law, taxpayers earning up to $40,295 (or $45,295 for married joint filers) are entitled to an earned income tax credit of up to $5,666.  The amount of credit depends on the amount of the taxpayer’s earned income and the number of qualifying children.55  For example, if a single taxpayer has earned income of $10,000 and has no children, the taxpayer is entitled to an earned income credit of $261.  If the same taxpayer has one child and the same income level, the taxpayer would be entitled to an earned income credit of $3,043; two children, an earned income credit of $4,010; and three or more children, an earned income credit of $4,511. 

The Child Tax Credit and Childcare Tax Credit.  Taxpayers are entitled to a $1,000 tax credit for every child under 17 years old who lives with the taxpayer.  This credit begins to phase out for single filers earning more than $75,000 and, for married taxpayers filing jointly, at $110,000.56

Taxpayers are also entitled to a child care tax credit of up to 35% of amounts paid for care of “qualifying children” under 13 (and certain other incapacitated dependents) if the amounts paid enable the taxpayer to work.  The child care credit is capped at $3,000 for one dependent or $6,000 for two or more, and begins to phase out when the taxpayer’s AGI is above $15,000 (but is always available for 20% of amounts paid) for each qualifying child (or other dependent).57

Education Tax Credits.  Three different programs provide education tax credits.  The Hope Scholarship tax credit entitles taxpayers to receive a tax credit of up to $1,500 for qualified tuition and related expenses paid by the taxpayer for the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependents to attend a post-secondary school at least half-time.58  The American Opportunity tax credit provides another $1,500 in 2010 for qualified tuition and related expenses, but phases out the credit for taxpayers earning more than $80,000 (or $160,000 for married taxpayers filing jointly).59  The Lifetime Learning credit entitles taxpayers with income below $50,000 ($100,000 for married taxpayers filing jointly) to receive an additional tax credit for post-secondary education equal to the lesser of 20% of qualified tuition and related expenses or $20,000.60

Health Coverage Tax Credit.  Eligible taxpayers are entitled to a refundable tax credit equal to 80% of premiums paid by the taxpayer on qualified health insurance plans for the taxpayer, the taxpayer’s spouse, and the taxpayer’s dependents.61

Making Work Pay Tax Credit.  Taxpayers are entitled to a credit equal to the lesser of 6.2% of earned income or $400 ($800 for married taxpayers filing jointly).  This credit is phased out for single taxpayers with a modified adjusted gross income exceeding $75,000 and for married taxpayers filing jointly with modified adjusted gross income exceeding $150,000.62

2.  Overview of the Proposals 

The Final Proposal retains the Earned Income Tax Credit and the Child Tax Credit but repeal the other credits.63  The Domenici-Rivlin Proposal replaces the Child Tax Credit with a higher $1,600 credit, replaces the Earned Income Tax Credit with a $4,324 worker “earnings credit,” and repeals the other credits.64

D.  Employer-Provided Health Insurance

1.  Current Law

Under current law, employees are not subject to tax on the premiums for their health insurance paid by their employers.65  However, beginning in 2018, there will be an excise tax of 40% imposed on employees who receive so-called “Cadillac plans” (i.e., plans whose annual premiums exceed $27,500 for families and $10,200 for individuals).66

2.  Overview of the Proposals

The Final Proposal would cap the exclusion from income of premiums for employer-provided health insurance at the 75th percentile of premium levels in 201467 and reduce the cap beginning in 2018, until 2028, when it would be phased out completely.  Thus, by 2028, all employees would report the premiums for health insurance paid by their employers as taxable income. The Final Proposal would also reduce the excise tax on Cadillac plans to 12% for years between 2018 and 2038.68

E.  The Alternative Minimum Tax

1.  Current Law

The alternative minimum tax (“AMT”) is an alternative tax.  Each year, taxpayers must pay either their regular income tax or their AMT liability, whichever is greater. The AMT is imposed at a maximum marginal rate of 28% (which is less than the maximum marginal rate of 35% for the regular income tax), but because the AMT denies a number of the exclusions, deductions, and credits permitted under the regular income tax, it may produce a higher tax liability than the regular income tax.69  For example, the AMT has no standard deduction and disallows some itemized deductions.70  Moreover, under the AMT:

  • state and local income as well as property and sales taxes cannot be deducted (other than property and sales taxes paid on business items);
  • medical expenses can be deducted only if they exceed 10% of income, as compared to 7.5% under the regular tax;
  • interest on home-equity loans can be deducted only if the loan proceeds are used for home improvements;
  • certain miscellaneous itemized deductions, including workers’ unreimbursed job expenses, investment-related expenses, and attorney’s fees paid by winners of taxable damage awards, cannot be claimed;71
  • the $3,650 per-person exemption for the taxpayer, spouse, and each child is not allowed;
  • the child-care credit, the Hope Scholarship credit, and the Lifetime Learning credit are not allowed;72
  • tax brackets are not indexed for inflation (unlike the tax brackets for the regular income tax, which are).73

Because the AMT disallows personal exemptions and the deduction for state and local income taxes, the AMT tends to have a greater effect on taxpayers with many children, taxpayers with high medical expenses, and taxpayers living in high-tax states, such as New York and California.

2.  Overview of the Proposals

Each of the proposals would repeal the AMT.74  Although each of the proposals would repeal the AMT, they all ironically have the effect of turning the regular income tax into a version of the AMT.  Thus, they each tend to reduce the regular income tax rate to a rate that approximates the AMT and they each deny or limit deductions, exemptions, and credits much in the same way as the AMT does.  Thus, the proposals will adversely affect taxpayers in high-tax states or with high medical expenses, much in the same way that the AMT does, but will not adversely affect taxpayers with many children.

F.  Dividend and Capital Gains Rates

1.  Current Law

For 2010, the maximum marginal rate for long-term capital gains and “qualified dividend income” is 15%.75  In 2011, the rates will increase to 20% for long-term capital gains and 39.6% for dividends unless Congress extends the lower rates.  Under current law, capital losses may offset only $3,000 of ordinary income each year.76   Reduced rates for capital gains have been justified (i) to promote capital investment and (ii) correct for the “lock-in effect” of our realization system (which discourages sales of capital assets).  The preference has been criticized on grounds of neutrality (growth stocks are favored over income stocks), equality (investors are favored over wage-earners), and distributional grounds (wealthy taxpayers earn a disproportionate amount of capital gains).77  Reduced rates for dividend income partially ameliorates the double taxation of corporate earnings and therefore minimizes the bias against investment in corporations.

2.  Overview of the Proposals

Each of the proposals would tax capital gains and dividends at the same rate as ordinary income (except that the Domenici-Rivlin Proposal would exempt the first $500 of capital gains and losses, or $1,000 for married couples).78  It is unclear whether the proposals would change the rule that capital losses can offset only $3,000 of ordinary income each year. 

3.  Commentary

By taxing capital gains at the same rate as ordinary income, the proposals effectively increase the tax rate of capital gains by between 80% (under Domenici-Rivlin) and 87% (under the Final Proposal and Co-Chairs’ Proposal).  The increase in rates for capital gains will tend to increase the “lock-in effect”; that is, taxpayers will be less likely to sell their appreciated assets and will be more likely to hedge their appreciated assets and borrow against (or “monetize”) them.79  The increase in the tax rate on dividends will discourage taxpayers from investing in dividend-paying corporations and increase the tax bias towards investment in “growth companies” that do not pay dividends.

It is unclear why the Domenici-Rivlin Proposal denies taxpayers losses for their first $500 of capital losses; this provision appears to be only a trap for the unwary taxpayer (who fails to sell capital assets with at least $500 of gains in the same year as he or she sells loss assets).  It appears that the proposals should retain current law’s capital loss limitations; otherwise, taxpayers would have the ability to selectively recognize losses and use them to offset ordinary income, but defer their gains.

G.  Value Added Tax; National Sales Tax; Energy Tax; Soda Tax; Alcohol Tax; Gasoline Tax

1.  Current Law

There is currently no national value added tax or sales tax, or national soda tax.80  There is an excise tax on alcohol that is administered by the Alcohol and Tobacco Tax and Trade Bureau.  Beer is taxed between $0.002 and $0.004 per ounce.81  Wine is taxed between $0.002 and $0.026 per ounce.82  Distilled spirits are taxed at $0.106 per ounce for 100 proof liquor, which translates to $0.21 per ounce of pure alcohol.83

The current federal excise tax on gasoline is $0.183 per gallon.84

2.  Overview of the Proposals

The Final Proposal and the Co-Chairs’ Proposal would increase the gasoline excise tax by $0.15/gallon beginning in 2013 (an increase of 81.5%).85  The Domenici-Rivlin Proposal does not contain a gasoline tax.

The Domenici-Rivlin Proposal would create a 6.5% “debt reduction sales tax.”86  This tax would apply to the purchase of all goods and services, without exception for necessities such as food or clothing. 

The Domenici-Rivlin Proposal would also impose an excise tax of $0.01 per ounce on beverages sweetened with sugar, high-fructose corn syrup, or similar sweeteners (but not beverages sweetened with artificial sweeteners such as aspartame or saccharine).87

The Domenici-Rivlin Proposal increases the alcohol excise tax to $0.25 per ounce.88  Although not entirely clear, it appears that the excise tax on a 12-ounce can of beer containing 3.5% alcohol by volume would be $0.105, an increase of between 162.50% and 425%,89 and the tax increase on distilled spirits would be about 16% (from $0.21/oz to $0.25/oz).90

H.  Social Security

1.  Current Law

Social Security is currently funded by payroll taxes of 6.2% on the first $106,800 of an employee’s gross wages (the payroll tax wage cap).91  The employer is also taxed at 6.2% on the first $106,800 of an employee’s gross wages.92  Taxpayers are eligible to receive full retirement benefits beginning at age 66.93  Currently, benefits are calculated based on a 35-year average of the taxpayer’s monthly income.94

Under current law, a taxpayer whose sole source of income consists of Social Security benefits pays no federal income tax; the exclusion for Social Security retirement benefit income is phased out for higher-income taxpayers, but all taxpayers are permitted to exclude up to 15% of their Social Security benefits from tax.95

2.  Overview of the Proposals

The Final Proposal urges consideration of a one-year “payroll tax holiday” in 2011.96  The Domenici-Rivlin Proposal includes the payroll tax holiday.97

The Final Proposal would increase the payroll tax wage cap (from $106,800) so that it applies to 90% of national wages by 2050 (which the Proposal estimates would raise the cap to about $190,000).98  The Domenici-Rivlin Proposal would include 100% of a taxpayer’s Social Security benefits in taxable income, subject to a refundable credit equal to 7.5% of benefits.99  (The Final Proposal is unclear on this.)  The Domenici-Rivlin Proposal would also create a non-refundable credit equal to 15% of the current standard deduction for taxpayers 65 years or older.100  By taxing social security benefits, the Domenici-Rivlin Proposal would dramatically increase the taxes paid by low-income social security beneficiaries (even taking into account the credit).101

The Final Proposal would raise the retirement age from 66 to 68 by 2050 and 69 by 2075.102  The Domenici-Rivlin plan, in contrast, would address increases in longevity by reducing the overall benefit rates by 0.3% per year to offset increases in life expectancy.103  Thus, under the Domenici-Rivlin Proposal, by 2043, benefits would be reduced by 6%.

Both the Final Proposal and the Domenici-Rivlin Proposal would raise the retirement benefits for taxpayers (by the equivalent of 1% of the average taxpayer’s monthly benefit) in each year between ages 85-89 (under the Final Proposal) and ages 81-85 (under Domenici-Rivlin).  The Final Proposal and the Domenici-Rivlin Proposal would also increase the minimum benefit to 125% of the federal poverty level for retirees who worked for at least 30 years (the Domenici-Rivlin Proposal would raise it to 133%).104  However, these increases would not entirely offset the additional tax liability under the Domenici-Rivlin Proposal.

3.  Commentary

The Final Proposal estimates that it will have the effect of raising the cap on the portion of wages subject to the 6.2% contribution from the current level of $106,800 to about $190,000.105  The Domenici-Rivlin Proposal would raise the cap to $180,000.  It is unclear why the cap is so low.

Although the Domenici-Rivlin Proposal increases the minimum benefit and raises the retirement benefits for taxpayers ages 81-85, these increases are offset by the 6.5% deficit reduction sales tax and the taxability of social security benefits.

The Final Proposal and the Domenici-Rivlin proposal each reduce benefits, but in different ways.  The Final Proposal would increase the retirement age; the Domenici-Rivlin proposal would retain the retirement age but decrease benefits.

I.  Estate Tax

1.  Current Law

In 2009, the estate tax was imposed on estates with a value in excess of $3.5 million; the maximum marginal tax rate was 45%.106

The estate tax was repealed for 2010 but, absent action by Congress, will be reinstated in 2011 and will apply to estates with a value in excess of $1 million, the maximum marginal tax rate will be 55%.107

2.  Overview of Proposals

The Domenici-Rivlin Proposal would impose the 2009 exclusion threshold and rates; that is, a marginal tax rate of 45% on estates with a value in excess of $3.5 million.108

The Final and Co-Chairs’ Proposals are silent on estate taxes.

III.  Proposals Affecting Corporations

A.  Current Law

Corporations are taxable at a maximum marginal rate of 35%, which is the highest marginal rate imposed by all developed countries.109  However, the United States’ corporate tax revenues are only slightly higher than the OECD average.110  This phenomena is attributed principally to the tax credits, deductions and exclusions available to corporations.  For example, various corporations are permitted (i) a 9% deduction equal to the income from manufacturing, construction and certain other domestic production activities,111 (ii) research and experimentation tax credits, (iii) accelerated depreciation deductions for certain property, (iv) unlimited deferral for the active business income earned by their foreign subsidiaries, (v) the last-in-first-out (or “LIFO”) method of accounting, which tends to defer taxation of economic income, (vi) tax credits for producing fuels from nonconventional sources, and (vii) investment tax credits for investment in renewable energy property and the rehabilitation of certain real property.112

B.  Overview of the Proposals

The Final Proposal would reduce the maximum marginal rate to 28%, eliminate the domestic production deduction, LIFO method of inventory accounting (subject to a transition rule), energy tax preferences, accelerated depreciation rules, and other tax credits.  It would convert the U.S. international tax system to a “territorial system” under which active foreign income would be exempt from tax (rather than only deferred as under current law); passive foreign-source income would be subject to tax immediately (as under current law).113

The Domenici-Rivlin Proposal would reduce the corporate tax rate to 27% and eliminate many corporate deductions, tax credits and exclusions (but retain the current U.S. international tax system and research and experimentation credits).114

C.  Commentary

The reduction of the corporation income tax coupled with the repeal of a great number of deductions, exclusions, and credits will produce winners and losers.  Multi-national corporations will generally win under the Final Proposal because their deferral of U.S. tax on active business income will be made permanent.  However, if the subpart F regime is overhauled in the process, U.S. multinationals may become losers.  Moreover, because the Final Proposal generally raises revenues, there are likely to be more losers than winners. 



1   The National Commission on Fiscal Responsibility and Reform, “The Moment of Truth”, available here (referred to in this memorandum as the “Final Proposal”).  The Final Proposal offers several options; this memorandum discusses only the “illustrative proposal.”

2   Co-Chairs’ Proposal (November 10, 2010 draft), available here (referred to in this memorandum as the “Co-Chairs’ Proposal”).

3   The Debt Reduction Task Force, Restoring America’s Future, Reviving the Economy, Cutting Spending and Debt, and Creating a Simple, Pro-Growth Tax System (Bipartisan Policy Center, November 2010), available at here.  We refer to the Debt Reduction Task Force proposal as the “Domenici-Rivlin Proposal.” 

4   Under current law, a 7.65% Social Security payroll tax is imposed on employers and a separate tax is imposed on employees.  However, 6.2% of the payroll tax is imposed on only a capped portion of wages ($106,800 for 2010). 

5   The Final Proposal offers several options; this memorandum discusses only the “illustrative proposal.”  See Final Proposal, page 31.

6   The Co-Chairs’ Proposal contains three separate options.  This chart summarizes the four versions of the “Zero Plan” option. 

7   Version 1 would eliminate most credits and deductions, and sets the rates at 8%, 14% and 23%.  Version 2 would retain the child tax credit and the earned income credit (the “EITC”), and sets rates at 9%, 15%, and 24%.  Version 3 would retain a limited mortgage interest deduction, and health, and retirement benefits at 80% of their current level and switch to a territorial system for foreign income taxation, and sets rates at 12%, 20%, and 27%.  Version 4 also keeps current mortgage, health, and retirement benefits, and sets rates at 13%, 21%, and 28%.

8   Subject to the “PEP” phase out beginning in 2011, discussed below.

9  The Final Proposal would permanently repeal the “PEP” phase out for personal exemptions.  Final Proposal, page 31.

10 $1,000 for married taxpayers.

11 Other programs include the Childcare tax credit ($3,000 - $6,000 tax credit for child care); Health Coverage tax credit (maximum: 80% of premiums); Making Work Pay tax credit (maximum: $400; $800 for married taxpayers filing jointly); the American Opportunity tax credit ($2,500/student for qualified tuition and related expenses); and, the Lifetime Learning tax credit (lesser of 20% of qualified tuition for post-secondary education and $20,000).

12 This is the same earnings credit mentioned under “Personal Exemption and Standard Deduction.”

13 Under current law, individuals may exclude up to $250,000 of gain and married taxpayers filing jointly may exclude up to $500,000 of gain on a sale of a residence that was the taxpayer’s principal residence for an aggregate of two of the last five years.  Section 121(b).

     Unless otherwise indicated, all references to section numbers are to the Internal Revenue Code.

14 Option 2 would limit the mortgage deduction to interest on up to $500,000 principal amount on a primary residence.

15 For example, in 2010, tax-free contributions to 401(k) retirement plans are limited to $16,500, and tax-free contributions to IRAs are limited to $5,000. 

16 For taxpayers in the highest (27%) tax bracket, this would be a deduction, not a refundable credit.  Final Proposal, page 31.

17 Beginning in 2018, a 40% excise tax will be imposed on so-called “Cadillac plans” (those with premiums exceeding $27,400 for families and $10,200 for individuals).  Section 4980I.

18 Option 2 allows charitable contribution deductions to the extent the contributions exceed 2% of AGI.

19 Subject to “Pease” phase out, starting in 2011, discussed below.

20 Option 2 would triple the standard deduction to $30,000 and repeal Pease.

21 The Domenici-Rivlin Proposal is silent on Pease.

22 Section 1411.

23 See generally Staff of the Joint Committee on Taxation, Present Law and Background Data Related to the Federal Tax System in Effect for 2010 and 2011 (JCX-19-10) (March 22, 2010), available here.

24 See section 61.

25 See section 62.  These deductions are referred to as “above-the-line” deductions.  Adjusted gross income (“AGI”) is gross income minus above-the-line deductions.

26 See section 151.  Starting in 2011, the “personal exemption phase-out” (or “PEP”) will be restored.  The PEP will “phase out” — or reduce — the personal exemption by 2% for each $2,500 of income over a threshold amount (which is adjusted for inflation).  The PEP threshold was $250,200 in 2009 (which was the last year the PEP was in effect).  President Obama has proposed to restore the PEP in 2011 at amounts estimated to be $254,550 for couples, $203,650 for singles, and $229,100 for heads of households.  See Patrick Fleenor, PEP and Pease: Repealed for 2010 But Preparing a Comeback, Tax Foundation (April, 2010), available here.

27 Home mortgage interest deductions are limited to the interest on up to $1.1 million principal amount of debt secured by the taxpayer’s primary residence or a secondary home (subject to limitations).  Section 163(h).

28 See section 63.  Starting in 2011, certain itemized deductions (including for mortgage interest, charitable gifts, and state and local taxes) will be reduced by 3% of the excess of a taxpayer's AGI over a threshold amount that is adjusted annually for inflation; however, the deductions will not be reduced below 20% of the taxpayer's itemized miscellaneous deductions (i.e., the reduction can be as much as 80% of the taxpayer's itemized deductions).  (This reduction is known as “Pease”, and is named after Rep. Donald Pease (D-OH) who advocated its enactment.)  The Pease reduction was repealed temporarily but unless Congress acts will be reinstated in 2011.  President Obama has proposed to maintain the reinstatement of Pease and raise the threshold to $254,550 for couples, $203,650 for singles, and $229,100 for heads of households.   (President Obama has also proposed to limit the benefit of deductions to 28%.)  See Patrick Fleenor, PEP and Pease: Repealed for 2010 But Preparing a Comeback, Tax Foundation (April, 2010), available at here.

29 Final Proposal, Figure 17 (Total Effect on General Revenues: $996 billion) and page 13 ($785 billion from “comprehensive tax reform; $210 billion from “other revenue); Co-Chairs’ Proposal, page 11 ($751 billion from “tax reform”; $210 billion from “other revenue”); page 23 ($1.1 trillion); Domenici-Rivlin Report, page 127 ($1.873 trillion tax expenditure cuts plus $435 billion in rate cuts and new revenue) and page 33 ($2.3 trillion through 2020).

30 The Domenici-Rivlin plan retains the exemption of interest on tax exempt bonds.  Domenici-Rivlin Proposal, page 130.  The Final Proposal repeals the exemption for newly-issued bonds.  Final Proposal, page 31.

31 Assume that a taxpayer in the 28% bracket earns marginal income of $10,000 and contributes it all to a retirement account.  The taxpayer would be subject to a tax of $2,800, offset by a credit of $1,500, for a net tax of $1,300.  However, because the marginal income of $10,000 was contributed to the retirement plan, the taxpayer would have to fund the tax from other sources.

32 The proposals are unclear on this point.  The proposals may also change the taxation of life insurance policies.  Under current law, beneficiaries of life insurance policies are not generally taxed on the income and gain of investments that support the policy — that is, they are not taxed on the “inside buildup” — and generally may exclude death benefits (including the inside buildup) from income.  It is unclear whether the proposals would change this treatment.

33  See The Tax Policy Center, “Bowles-Simpson Deficit Commission; Illustrative Tax Reform Option with Individual Rates of 12, 22, and 28 Percent.  Baseline: Current Law, Distribution of Federal Tax Change by Cash Income Percentile, Proposal in 2020 Evaluated at 2015 Income Levels,” December 1, 2010, available here, and The Tax Policy Center, “Bowles-Simpson Deficit Commission; Illustrative Tax Reform Option with Individual Rates of 12, 22, and 28 Percent. Baseline: Current Policy; Distribution of Federal Tax Change by Cash Income Percentile, Proposal in 2020 Evaluated at 2015 Income Levels,” available here.

For the Tax Policy Center’s analyses, current law assumes that the Bush tax cuts will expire and that Congress does not enact a patch for the AMT.

34 The Tax Policy Center’s estimate does not take into account behavioral changes.

35 The ability of wealthy taxpayers to indefinitely definitely defer tax on their appreciated publicly-traded securities could be addressed with a mark-to-market tax on the publicly-traded securities of the 0.1% wealthiest and highest-income taxpayers.  See, e.g., David S. Miller, A Progressive System of Mark-to-Market Taxation, Tax Notes 1047 (November 21, 2005), available here.

36 8.97% New York State tax plus 3.648% New York City tax = 12.618%. 

37 Because the couple’s tentative minimum tax of $2,796,500 (28% x $10 million, or $2,800,000, less $3,500) is less than their regular tax ($3,055,815), they would have no additional tax liability under the AMT. 

38 28% x ($10 million - $11,400 standard deductions - $7,300 personal exemptions).

39 35% x ($10 million - $7,300 personal exemptions).

40 28% x ($10 million - $11,400 standard deductions - $7,300 personal exemptions).

41 (27% x $10 million) - $4,324 “earnings credit.”  The “earnings credit” is equal to 21.3% of the first $20,300 of income, and is not phased out for high-income taxpayers.

42 (27% x $10 million) - $4,324 “earnings credit.” 

43 The couple would have an after-tax income of $7,304,324 ($10,000,000 - $2,695,676 federal tax liability).  If the couple spent all of this after-tax income, the couple would pay an additional $474,781 in deficit reduction sales taxes (6.5% x $7,304,324).  $2,695,676 + $474,781 = $3,170,457.

44 Under version 1 of the Co-Chairs’ Zero Plan Option, the couple’s tax liability would be $2,300,000 ($10 million x 23%), $755,815 less than under current law (a 24.7% tax cut).  If the couple lived in Florida, their tax liability would be $1,197,445 less than under current law, representing a 34.2% tax cut.  In fact, the couple receives a tax cut under each version of the Co-Chairs’ Zero Plan Option, regardless of which state they live in (ranging from 34.2%-8.4%).  No matter which state the couple lives in, their tax burden under version 2 of the Co-Chairs’ Zero Plan would be $2,400,000, under version 3 their tax burden would be $2,700,000, and under version 4 their tax burden would be $2,800,000.  If the couple lives in New York, this represents a tax cut of 21.5%, 11.6%, and 8.4%, respectively.  If the couple lives in Florida, this represents a tax cut of 31.4%, 22.8%, and 19.9%, respectively.

45 In this example, the couple’s state and local taxes would be $4,467 if they lived in New York City (12.618% x $34,500).  Because the itemized deduction for state and local taxes paid ($4,467) would be less than the standard deduction ($11,400), the couple will take the standard deduction.  Therefore, the outcome of this example does not change based on where the couple lives.

46 10% x ($35,400 - $11,400 standard deduction - $7,300 personal exemptions).  Married couples with no children and an AGI of more than $18,440 who file a joint return are not entitled to the earned income credit.  Married couples filing jointly with an AGI of less than $70,950 do not have any additional tax liability under the AMT.

47 12% x ($35,400 - $11,400 standard deduction - $7,300 personal exemptions).

48 $334/$1,670.

49 (15% x $35,400) - $4,324 earnings credit=$986.

50 $684/$1,670.

51 6.5% x $3,414=$2,237, $2,237 + $986=$3,223.

52 $1,553/$1,670.

53 $10,523.07 x 6.5% = $684, which was their federal income tax savings under the Domenici-Rivlin Proposal.

54 Domenici-Rivlin Proposal, page 37.

55 The credit is available for taxpayers with an adjusted gross income of less than $43,279 ($48,279 for married joint filers) and three or more qualifying children; for taxpayers with an adjusted gross income of less than $40,295 ($45,295 for married joint filers) and two qualifying children; for taxpayers with an adjusted gross income of less than $35,463 ($40,463 for married joint filers) and one qualifying child; and for taxpayers with an adjusted gross income of less than $13,440 ($18,440 for married joint filers) and no qualifying children.  Section 32.

56 Section 24.

57 Section 21.

58 Section 25A(b).

59 Section 25A(i).

60 Section 25A(c).

61 Section 35.  To be eligible, a taxpayer must receive a Trade Adjustment Allowance under title II of the Trade Act of 1974 (a federal subsidy paid to individuals who have lost work because of the increase of foreign imports or because the individual’s job was exported to another country) or receive benefits from the Benefit Guarantee Corporation and be at least 55 years old.   After January 1, 2011, the amount of the credit is reduced to 65% of amounts paid by the eligible taxpayer. 

62 Section 36A.  Modified adjusted gross income is adjusted gross income increased by exclusions for U.S. citizens living abroad (under section 911), income from sources within Guam, American Samoa, the Northern Mariana Islands (under section 931), and income from sources within Puerto Rico (under section 933).  This credit expires at the end of 2010.

63 Final Proposal, page 31.

64 Domenici-Rivlin Proposal, page 37.

65 Section 106.

66 Section 4980I.

67 It is unclear what the 75th percentile will be in 2014; however, in 2007, the 75th percentile was $17,280 for families and $6,780 for individuals.  See Congressional Budget Office, Budget Options, Volume 1: Health Care, December 2007, p.24, available here.  In 2018, the 75th percentile is projected to be $27,500 for families and $10,200 for individuals.  See Domenici-Rivlin Proposal, page 50.

68 Final Proposal, page 31.  Although the Final Proposal would reduce the excise tax to 12%, when the excise tax is applied with the 28% marginal income tax rate, the effective rate would still be a 40% tax on Cadillac plans.

69 See section 57.  For an excellent summary of the alternative minimum tax, see Alan Viard, The Alternative Minimum Tax, American Enterprise Institute for Public Policy (November, 2006), available here.

70 Section 56(b).  In addition, (i) interest on private-activity municipal bonds, such as those used to finance industrial projects, is included under the AMT, but not under the regular tax, (ii) in computing income for owners of pass-through businesses, the AMT denies some accelerated depreciation and imposes restrictions on the use of prior year losses to offset current income, and (iii) the AMT is imposed on holders of incentive stock options when they exercise the option, rather than when the stock is sold.

71 The regular tax allows these deductions to the extent they exceed 2% of AGI.

72 The AMT allows the $1,000 child credit, the earned income tax credit, the adoption credit, and the foreign-tax credit.

73 To prevent an increased number of taxpayers being subject to the AMT, Congress has annually enacted “patches,” which temporarily provide higher AMT tax-free amounts and temporarily allow certain personal tax credits to be claimed against the AMT.

74 Final Proposal, page 31; Co-Chairs’ Proposal, page 23; Domenici-Rivlin Proposal, page 126.

75 Qualified dividend income is a dividend received from a domestic corporation or a “qualified foreign corporation.”  The taxpayer must hold the relevant stock for more than 90 days during the 181-day period starting 45 days before the ex-dividend date, and must not be obligated (under a short sale agreement or otherwise) to make related payments with respect to positions in substantially similar stock.  Section 1(h)(11).

76 Section 1211(b)(1).

77 See generally Joseph M. Dodge, “Restoring Preferential Capital Gains Treatment under a Flat Rate Income Tax; Panacea or Placebo?” 44 Tax Notes 1133 (September 4, 1989).

78 Final Proposal, page 31; Co-Chairs’ Proposal, page 24; Domenici-Rivlin Proposal, page 39.

79 The Domenici-Rivlin report argues that these adverse effects “should be minimal” because the highest marginal rate is only 27%.

80 A number of states have imposed a sales tax on soda (or carbonated beverages).

81 Section 5051.  Beer is generally taxed at $0.004 per ounce; however, beer producers that produce less than 2 million barrels annually are taxed at only $0.002 per ounce on the first 60,000 barrels produced.

82 Wine with 14% alcohol by volume is taxed at $0.008 per ounce; wine with 14% to 21% alcohol by volume is taxed at $0.012 per ounce; wine with 21% to 24% alcohol by volume is taxed at $0.024 per ounce; naturally sparkling wine is taxed at $0.026 per ounce; hard cider is taxed at $0.002 per ounce.  27 C.F.R. section 24.270-279.

83 The rate is adjusted according to the alcohol content of the liquor, so an 80 proof liquor is taxed at $0.084 per ounce.  51 U.S.C. section 5001.

84 Section 4081.

85 Final Proposal, page 24; Co-Chairs’ Proposal, page 29.

86 Domenici-Rivlin Proposal, page 40.

87 Domenici-Rivlin Proposal, page 69.

88 Domenici-Rivlin Proposal, page 32.

89 (0.105 - .04/.04) = 162.50%; (0.105 - .02/.02) = 425%.

90 ($0.25 - $0.053)/$0.053 = 372%.

91 Section 3101.

92 Section 3111.

93 Partial retirement benefits are available at age 62.  Taxpayers who wait to retire past age 67 (but before age 70) are entitled to increased benefits.

94 42 U.S.C. section 415.  The retirement benefit a taxpayer receives is calculated by averaging his or her “maximum amount” of annual income over the 35 years prior to the taxpayer retiring.  (The maximum amount of income is equal to the payroll tax wage cap; any annual income above the payroll tax wage cap amount is disregarded when calculating Social Security retirement benefits.  A taxpayer who earned $200,000 in 2009 would only include $106,800 in the average annual income calculation.)  This number is divided by 12 to determine the taxpayer’s average monthly wage.  For 2011, the taxpayer then receives, as a monthly benefit, 90% of the first $749 of this monthly average wage (the first “bend point”), 32% of the amount between $749 and $4,517 (the second “bend point”), and 15% of any remaining amount above $4,517.  The bend points are adjusted each year to compensate for changes in average wages.  

95 Section 86.

96 Final Proposal, page 43.

97 Domenici-Rivlin Proposal, page 26.

98 The current payroll tax wage cap ($106,800) applies to only 83% of national wages.  Both the Final Proposal and the Domenici-Rivlin plan would increase the payroll tax wage cap until it applies to 90% of national wages.  The Final Proposal estimates that this will raise this cap to $190,000.  Final Proposal, page 51.  The Domenici-Rivlin plan estimates that the proposal will raise the cap to about $180,000.  Domenici-Rivlin Proposal, page 76.

99 Domenici-Rivlin Proposal, page 129.

100 Domenici-Rivlin Proposal, page 129.  The current standard deduction, including the additional deduction for the elderly, is $7,100 for a single taxpayer, $12,500 for a married taxpayer filing a joint return (where only one of the couple is over 65 years old), or $13,600 for a married taxpayer filing jointly (where the taxpayer and his or her spouse are age 65 or older).  Section 63.

101 If a 66 year-old taxpayer’s sole income is $1,000 per month in Social Security retirement benefits, the taxpayer would not have any tax liability under current law.  (Social Security recipients with incomes less than $25,000 do not pay income tax on their Social Security benefits.)  Under the Domenici-Rivlin Proposal, the taxpayer would have a tax liability of  $2,355 (($24,000 x 15%) – ($24,000 x 7.5%) (refundable credit) – ($7,100 x 15%) (current standard deduction + deduction for elderly)).  This is a 9.81% reduction in after-tax income ($2,355/$24,000).  The tax treatment of Social Security retirement benefits under the Co-Chairs’ plan is unclear.

102 Final Proposal, page 50.

103 Domenici-Rivlin Proposal, page 82.

104 Under current law, the minimum Social Security benefit is calculated based number of “years of coverage” (in which the taxpayer earned certain minimum amounts) and ranges from $36.90 per month (for a taxpayer with 11 years of coverage) to $763.20 per month (for a taxpayer with 30 years of coverage). 

105 Final Proposal, page 46.

106 Section 2001.

107 The Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law No. 107-16, Section 901 (2001).

108 Domenici-Rivlin Proposal, page 126.

109 See The Organisation for Economic Cooperation and Development, OECD Tax Database, available here.  The United States has the highest federal corporate marginal rate but under some measures the United States is behind France and Japan.

110 Tax Policy Center of the Urban Institute and Brookings Institution, “The Numbers: How do U.S. taxes compare internationally?”, available here.  Corporate income taxes represented 12% of U.S. GDP in 2006, only slightly higher than the OECD average of 11%.

111 See section 199; see generally Staff of the Joint Committee on Taxation, Present Law and Background Data Related to the Federal Tax System in Effect for 2010 and 2011 (JCX-19-10) (pp15-16), available here.

112 Other tax credits include the alcohol and other fuels credit, the low-income housing credit, the enhanced oil recovery credit, the recovery credit, the work opportunity credit and the disabled access credit.  See Staff of the Joint Committee on Taxation, Present Law and Background Data Related to the Federal Tax System in Effect for 2010 and 2011 (JCX-19-10) (March 22, 2010), page 17, available here.

113 Final Proposal, pages 32-33.  A territorial system generally exempts foreign source income (or only active foreign source income) from tax.

114 Domenici-Rivlin Proposal, page 35.

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