Scoring the Bowles-Simpson Tax Proposal

by Veronique de Rugy

The Tax Policy Center has put out a preliminary analysis of the tax proposal in the fiscal commission’s report. The proposal includes eliminating most tax expenditures (except the earned income tax credit and the child tax credit), lowering rates, increasing the fraction of wages subject to the Social Security tax, and increasing the gasoline tax by 15 cents per gallon, plus a few other changes. As economist Donal Marron reports, the final result depends greatly on what baseline you compare the proposal against.

For instance, if the current policy remains in place, the AMT is patched, and the 2001 and 2003 tax cuts don’t expire, then the commission plan raises taxes on everybody:

The Bowles-Simpson proposal is indeed an across-the-board tax increase– and a fairly progressive one at that. In 2015, the lowest earners would face an average cut in their after-tax income of 3.4 percent or about $400. Middle-income households (those earning an average of about $60,000) would see their after-tax incomes fall by 4 percent or about $1,900. On the other end of the economic food chain, the top one percent of earners (who earn an average of about $2 million) would lose about $77,000 (5.3 percent) while the top 0.1 percent would see their after-tax incomes cut by nearly 8 percent, or close to $500,000.

On the other hand, if the 2001 and 2003 tax cuts expire as scheduled and the AMT expands its reach, things look different.

While low-income households and the top one percent of earners would be hit with a tax increase, the upper middle class would enjoy a small tax cut averaging about 1 percent.

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