Committee for a Responsible Federal Budget

Ross Gets Specific on Tax Reform

Jan 16, 2013 | Taxes

Yesterday, Rep. Dennis A. Ross (R-FL) introduced H.R. 243, otherwise cited as the Bowles-Simpson Plan of Lowering America's Debt (BOLD) Act, a bill that contains some policies found in the Simpson-Bowles plan. The BOLD Act includes some spending cuts -- such as reducing Congressional and White House expenditures by 15%, prohibiting earmarks, reducing federal travel, and imposing an additional 3-year pay freeze on federal workers and DOD civilians -- that could be undertaken to reduce the debt. But more importantly, the bill goes into significant detail on tax reform, naming not only the broad parameters of the tax system but also many tax expenditure reductions or eliminations to help the offset the cost. Some of the notable measures are:

  • Replacing the current seven individual income tax brackets (10/15/25/28/33/35/39.6) with two rates of 10 and 20 percent
  • Repealing the Alternative Minimum Tax, Personal Exemption Phase-out, and Pease phase-out
  • Reducing the corporate tax rate to 20 percent

The bill then calls for the elimination of a number of tax expenditurs in various areas in both the individual and corporate tax code. Some of the bigger eliminations include the earned income tax credit, the domestic production activities deduction, the child and dependent care credit, accelerated depreciation for new investment, and various energy preferences. The plan does leave many tax expenditurs in place like the mortgage interest deduction, charitable deduction, child tax credit, retirement savings preferences, and step-up basis for capital gains at death.

In addition to the BOLD Act, Rep. Ross introduced the ZERO Act, which would require agencies to justify each activity, in the manner of zero-based budgeting. Agencies would need to do the following for each spending item:

  • Provide a description of each activity that requires an appropriation from Congress
  • Cite to Congress the legal basis under which they may lawfully receive an appropriation
  • Offer three alternative funding levels  
  • Provide a summary of the cost effectiveness and efficiency to the taxpayer for each activity that requires an appropriation from Congress

Although the budgetary impact is unclear (it appears the tax reform portion would lose revenues), we applaud Rep. Ross for proposing specific reforms, particularly which tax expenditures would be reformed. Tax reform will be critical in the upcoming budget negotiations, and ideally should seek to raise additional revenues as part of a comprehensive plan to control rising debt. We appreciate his eye for reforming the budget process to make spending more efficient. While tax reform will be critical in the upcoming year, we also need to be looking at reforming entitlement programs, which are the true drivers of long-term deficits and haven't yet been addressed. The sooner the discussion on tax reform and entitlement reforms gets rolling, the better.

Note: This blog has been updated from its original posting to include a description of the ZERO Act.