The Distributional Effects of the Bowles-Simpson Tax Proposal

Today Eric Toder and Daniel Baneman of the Tax Policy Center released a preliminary analysis of the tax proposal put forward by the fiscal commission’s co-chairs Erskine Bowles and Alan Simpson. The centerpiece of their proposal is to eliminate almost all tax expenditures* except the earned income tax credit and the child tax credit and use the resulting revenues for a mix of deficit reduction and tax rate cuts (they also consider other options that would retain more tax expenditures). The proposal would also increase the fraction of wages subject to the Social Security tax, increase the gasoline tax by 15 cents per gallon, and make a few other changes.

The distributional impacts of the proposal depend greatly on what baseline you compare against. As my TPC colleague Howard Gleckman notes, if you use current policy (in which the 2001 and 2003 tax cuts remain in place and the alternative minimum tax is patched), then the Bowles-Simpson 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.

Things look different if your baseline is current law–in which all the 2001 and 2003 tax cuts expire and the AMT remains unpatched. In that case:

[T]he distributional impact of the Bowles-Simpson plan would be quite 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.

You can find all the details here.

* Added 11/17: As noted in a previous post, the concept of tax expenditures officially includes the lower tax rates paid on capital gains and dividends. So whenever you hear the phrase “eliminate tax expenditures”, that means not only eliminating deductions, credits, etc., but also taxing capital gains and dividends as ordinary income.