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Effects of the Tax Reform Panel’s Proposals on Low- and Moderate-Income Households

Executive Summary

On November 1, 2005, the President’s Advisory Panel on Tax Reform presented its recommendations to Treasury Secretary John Snow.  The panel’s report offers two alternative comprehensive reform plans, a “simplified income tax plan” and a “growth and investment tax plan.”  Both plans, the panel argues, would improve on the current system with respect to simplicity, fairness, and effects on economic growth. 

A previous CBPP analysis evaluated the impact of the panel’s proposals on revenue collections and concluded that adopting either plan would increase deficits by $1.8 trillion over the next decade, and by significantly more thereafter.[2]  Because of these deficit effects, both plans, whatever their other virtues, would likely hinder rather than promote economic growth.  Both plans also would lock in the regressive distributional effects of the 2001 and 2003 tax cuts, making the tax system less fair.

In this analysis, we set aside our concerns regarding the overall merits of the reform plans and instead examine the direct effects of certain aspects of the panel’s proposals on low- and moderate-income households.  Specifically, we consider the effects of the proposed family and work credit structure, the elimination of most itemized deductions, the conversion of the home mortgage interest deduction into a home credit, and the introduction of a refundable saver’s credit.

Our overall conclusion is that the structural changes the panel recommends would leave most low- and moderate-income households as well or better off than under current law and would make the tax system fairer and simpler.  Aspects of the proposals would have detrimental effects on some low- and moderate-income households, but many of these problems could be addressed through appropriate modification of the relevant provisions.

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End Notes

[1] The authors would like to thank Jason Furman, Robert Greenstein, Iris Lav, Jason Levitis, Barbara Sard, Arloc Sherman, and John Wancheck for their contributions to this analysis.

[2] Jason Furman, “The Tax Reform Panel’s Costly Proposal,” Center on Budget and Policy Priorities, November 30, 2005.