Will the Deficit-Cutting Plan Affect You?

Have you heard?

On Wednesday, the National Commission on Fiscal Responsibility and Reform proposed a $3.8 trillion deficit-cutting plan that would trim Social Security and Medicare, reduce income-tax rates, and eliminate tax breaks to reduce the annual deficit from $1.3 trillion this year to about $400 billion by 2015 -- all in an effort to start reducing the $13.7 trillion national debt.

Elimination of mortgage-interest tax breakWhat are the specifics?

The plan would: 
  • Eliminate tax breaks, including the mortgage-interest deduction
  • Raise the gas tax 15 cents starting in 2015
  • Slash defense spending (by $100 billion) and farm subsidies (by $3 billion/year)
  • Raise the Social Security retirement age to 68 in 2050 and 69 in 2075
  • Cut $733 billion in mandatory spending (for Social Security, Medicare for the elderly and Medicaid for the poor)
  • Freeze federal salaries for 3 years and cut the federal workforce by 10%
  • End government funding for National Public Radio and the Public Broadcasting Service

Under one option, income-tax rates would be reduced to three levels: 8 percent, 14 percent and 23 percent. Currently, there are six tax levels ranging from 10 percent to 35 percent. The corporate income-tax rate would be cut to 26 percent from 35 percent.

The plan includes two less sweeping alternatives to ending all tax breaks, including one in which a pared back mortgage tax deduction would be retained. Under that proposal, homeowners could not take the break for second homes, mortgages worth more than $500,000 or home equity loans.

Wiping out all tax breaks, including the home mortgage- interest deduction, while lowering rates would cost taxpayers $100 billion a year. 

Isn't this bad timing?

None of the proposals would take effect next year to avoid disrupting the economic recovery. The savings would come between 2012 and 2020, cutting the deficit from the current 9 percent of the nation's gross domestic product to about 2.2 percent in 2015, exceeding Obama's goal of a reductions to 3 percent of GDP.

What's the reaction in Washington?Reaction

We can guess how you probably feel about these proposed deficit-cutting measures, but what about our elected officials? The plan's release created instant opposition from Democrats, some Republicans, and groups such as the Mortgage Bankers Association.

Some are saying that the mortgage-interest reduction option would drive down home prices and wreak havoc on the housing market. Other say that deduction disproportionately benefits wealthier homeowners and it needs to be revised.

President Obama is currently traveling in Asia and has yet to read the plan, but said that critics should withhold their judgment until the final report. He urged congressional leaders to match rhetoric with action and join him in making difficult decisions about taxes and spending.

"So before anybody starts shooting down proposals, I think we need to listen, we need to gather up all the facts," Obama said at a press conference in South Korea. "If people are, in fact, concerned about spending, debt, deficits and the future of our country, then they're going to need to be armed with the information about the kinds of choices that are going to be involved."

Want more information?

Check out this Bloomberg article for even more details.

As always, we're here for you!

If you have any bookkeeping, accounting needs, or tax-related questions anytime throughout the year, we're available to help. Email us at info@macoassociates.com.

Check out our blog for regular tax updates (and for updates on how this plan progresses over the next few months), as well as the Resources section of our website, where we post archived Tax Tips newsletters, tax calculators, and IRS forms to download.

- Maco & Associates