The third version of the "Simpson-Bowles" plan was released this morning.  Below are some preliminary observations:

The plan raises taxes by $739 billion, but isn't honest about it.  The Simpson-Bowles plan headline report says it only raises taxes by $585 billion over a decade by eliminating or limiting tax deductions and credits (beyond what is needed to lower rates).  But there is much more to the story.

"Chained CPI" tax hike included.  However, the plan also calls for "Chained CPI," which the President's FY 2014 budget says raises taxes by another $100 billion over the decade, and this plan's Figure 21 (buried deep in the appendix) says will raise taxes by $124 billion. 

Secret IRS audit slush fund.  There's a third hidden tax increase, again only to be found buried in Figure 21.  This is "program integrity," which is a polite euphemism for creating a fishing expedition audit slush fund for the IRS.  This is expected to raise another $30 billion by 2023.

Put it all together, and the plan raises taxes by $739 billion over the next decade.

In addition, the plan improperly counts interest savings derived from tax increases as spending cuts.  For ratio purposes, these should be properly-allocated to the tax side of the ledger.

The plan has a 2:1 ratio of spending cuts to tax increases.  When properly-allocated, the Simpson-Bowles plan cuts about $2 in spending for every $1 in tax increases.  That might sound "balanced," except that it comes on the heels of the tax increases already forced on Americans by President Obama in the fiscal cliff (later reduced by Congress).  It also happens to be the same "Lucy and the football" ratio from the 1990 "Read My Lips" Andrews Air Force Base deal that cost President George H.W. Bush a second term.

Simpson-Bowles 3.0 would raise tax revenues to 19.7 percent of the economy by 2023.  Under current law, 2023 revenues are projected to be 19.1 percent of economic output.  Note that this is already far higher than the historical average level of tax revenues (18 percent of the economy).  Not content with being a full percentage point higher than the historical average, Simpson-Bowles wants even more.  In the future, taxes would rise even higher as the effects of Chained CPI and the "Step 4" tax hikes take effect (more on that below).

"Tax reform" proposal would create an inferior tax system to the current one.  There is a plan for "tax reform" in the Simpson-Bowles plan, but it really isn't much of a reform.  The whole idea behind tax reform is to collect the same amount of money as today, but in a smarter way–that's what the 1986 Tax Reform Act was all about, or at least tried to be.  Real tax reform is revenue-neutral, not a stalking horse for higher taxes.

This plan increases taxes by over $700 billion, and hopes you don't notice because rates come down.

Even within this faux-reform, there's a lot of bad policy

  • Depreciation lives are extended when we should be moving toward full business expensing.  All business inputs should be deducted from the tax base in the year of purchase.
  • The top rate of 28 percent for corporations is still too high.  When state corporate rates are factored in, there's still an international-comparison rate of over 32 percent.  That leaves the United States' marginal rate higher than all but a very small handful of our competitors.  France, Japan, and Belgium would all have higher rates than the U.S. under this plan.  However, all the other OECD countries would retain their rate advantage.  This is particularly-damaging when it comes to major trade partners like Germany, the United Kingdom, Canada, and Mexico.
  • There's a new 401(k)/IRA cap of $20,000.  If anything, these accounts should be completely-uncapped to reduce the double taxation of savings and investment.
  • Capital gains and dividends would see a tax rate hike from 23.8 percent today to 28 percent under the plan.  That moves in the wrong direction–the proper tax rate for this income is 0 percent, since it already faced taxation at the corporate level
  • Step-up basis for capital gains is removed.  This is particularly-bad, since the plan fails to repeal the death tax.  The whole point of step-up basis is that the death tax has captured the inter-generational transfer already.  It's just another layer of tax on savings.

The tax reform plan does do a few good things: it moves toward a territorial system, repeals the AMT, and rates are reduced somewhat to a top rate of 28 percent.  But on balance, the tax reform plan would probably be a net negative compared to current law.  Any tax reform plan which increases the cost of capital this much–even with a rate reduction–is deeply-flawed.  And the fact that it's fake tax reform because it simply masks a giant tax hike makes it truly unserious.

"Step Four" tax hikes could be even worse.  All of the tax hikes described above are just the first stage of new tax hikes in the Simpson-Bowles plan.  There's also a shadowy "Step Four" which calls for even deeper tax increases to "fix" the entitlement crisis (which, let's not forget, is a spending problem).  Step Four gives a menu of options, but there are some tax increases in that menu, including:

  • Increasing the Social Security taxable wage base to 90 percent of wages and pegging this to wage growth
  • Enrolling people currently lucky enough not to be paying into Social Security today
  • Taxation of employer-provided health insurance benefits as wages
  • An increase in the federal gas tax of $0.11 or $0.12 per gallon

Obamacare is left completely untouched.  Interestingly, the plan doesn't call for any substantial changes to be made to Obamacare.  This is despite the fact that Obamacare will cost trillions of dollars in new federal spending over the next few decades, and Senator Max Baucus (D-Mont.) recently called its implementation a "train wreck."

A more serious plan has already passed the U.S. House of Representatives three times.  The budget written by Congressman Paul Ryan (R-Wisc.) has passed the House three times.  The Ryan budget does not raise taxes a time, reforms the tax system the right way, repeals Obamacare, and reduces the debt/GDP ratio far more than any version of Simpson-Bowles ever has.

The Simpson-Bowles plan was brought to a vote on the House floor and it failed miserably.  When an earlier version of this plan was voted on by the House, it only managed to garner 28 votes.  That means almost 94 percent of the House did not support it.  Unlike the Ryan budget, it has no hope of passage and will never achieve any political success.