Bipartisan borrowing plan cuts tax breaks

WASHINGTON -- A new bipartisan plan to reduce government borrowing would target some of the most cherished tax breaks enjoyed by millions of families -- those promoting health insurance, home ownership, charitable giving and retirement savings -- in exchange for lowering overall tax rates for everyone.

Many taxpayers would face higher taxes -- a total of at least $1.2 trillion over the next decade, and perhaps more.

The bipartisan plan punts on many of the most difficult issues, leaving it to congressional committees to fill in the details later. But supporters say it provides a framework to simplify the tax code, making it easier for businesses and individuals to comply while eliminating incentives to game the system.

"I think this is an attempt to find a middle ground on taxes that emphasizes keeping rates low and broadening the base as much as possible, and I think that's a very positive aspect of it," said Eugene Steuerle, a former Treasury official who worked on the 1986 tax reform package that passed Congress.

Coupled with spending cuts, the plan would reduce deficits by nearly $4 trillion over the next decade. President Barack Obama and senators from both parties lauded it as a possible breakthrough in negotiations to allow the government to incur further debt and avert a possible Aug. 2 default.

Some congressional leaders, however, said the plan lacks details and could produce much bigger tax increases than advertised. The Republican staff of the House Budget Committee issued a critique saying the revenue increase could exceed $2 trillion over the next decade, when compared with current tax policy.

"A tax increase is the wrong policy to pursue with so many Americans out of work," said House Majority Leader Eric Cantor (R-Va.)

The plan would simplify the tax code by reducing the number of tax brackets from six to three, lowering the top rate from 35 percent to somewhere between 23 percent and 29 percent. That could provide a windfall for wealthy taxpayers because the 35 percent tax bracket currently applies to taxable income above $379,150.

To help pay for lower rates, the plan would reduce popular tax breaks for mortgage interest, health insurance, charitable giving and retirement savings. Other tax breaks would be spared, including the $1,000-per-child tax credit and the earned income tax credit, which helps the working poor stay out of poverty.

The alternative minimum tax, which was enacted in 1969 to make sure that high-income families pay at least some income tax, would be repealed. The tax was never indexed for inflation, so Congress routinely patches it each year -- at an annual cost of about $70 billion -- to prevent it from hitting more than 20 million middle-income families.

About 35 million households claimed the mortgage interest deduction in 2009, and about 36 million households claimed deductions for charitable contributions, according to the Joint Committee on Taxation, the congressional scorekeeper on taxes.