Estimates of the Wyden-Gregg Tax Reform Bill

A few months back, we discussed a comprehensive proposal by Senators Ron Wyden (D-OR) and Judd Gregg (R-NH), the Bipartisan Tax Fairness and Simplification Act of 2010. Wyden-Gregg would, as its name indicates, simplify the tax system in many ways.  It would reduce the number of income tax brackets from six to three, with rates of 15, 25, and 35 percent. As a side note, the brackets would be adjusted for inflation based on a different measure, the chained CPI, which is one of the options included in our budget simulator.

The proposal would also eliminate a number of tax expenditures, and replace the preferential rates for capital gains and dividends with a tax exclusion on 35% of them. It would also nearly triple of the standard deduction, which would discourage taxpayers from itemizing and thus ease the burden some on the largest tax expenditures.  However, it leaves those big ticket items, like the exclusion for employer sponsored health insurance and the mortgage interest deduction, untouched. And the Earned Income Tax Credit, dependent care credit, and child tax credit expansions that have been enacted since 2001 would be extended.

The Wyden-Gregg proposal also drastically simplifies the corporate income tax.  There would be a flat 24 percent rate, down from a top marginal rate of 35 percent, and many of the preferences built into the tax would be eliminated. 

Yesterday, Tax Policy Center came out with revenue estimates of the proposal. Just as described earlier, Wyden-Gregg would be just about deficit-neutral relative to a current policy baseline, raising $22 billion over the next ten years and $31 billion in 2020 alone. Additional proposed (but unspecified) cuts in corporate welfare would roughly align the deficit-impact with that of the President's tax plan.

Still, the bill drastically increases deficits relative to a current law baseline -- by $4 trillion over the next decade. This is a cause for serious concern. It essentially means the costs of continuing the 2001/2003 tax cuts and AMT patches will be deficit-financed.

Compared to a current policy baseline, the rate changes alone would have the effect of raising $600 billion. Yet compared to a current law baseline, they would cost nearly $1.3 trillion.

Here is a breakdown of the bill:

Overall, the Wyden-Gregg proposal is a good start for tax reform, but it is not a finished product. It does significantly simplify the individual and corporate income taxes, but it leaves many of the largest tax expenditures completely untouched. It also does not raise enough revenue to help put a dent in our deficits, though it is an improvement over current policy. The plan could shoot for being closer to deficit-neutral relative to current law, either by itself or when combined with spending reforms. They could accomplish the goal, for example, by scaling back the corporate rate cuts, increasing the standard deduction less, making the income tax rates a little higher, or going after the biggest and most distortionary tax expenditures. Nonetheless, making our tax code more efficient should be a top priority if we are to raise revenue in a less economically damaging way; Wyden-Gregg puts us on the right path in that respect, even if they fall short in terms of revenue.