Obama’s Rejection of Deficit Package Doesn’t Reflect Plan

An explanation President Barack Obama gave in a book released today for declining to embrace a bipartisan panel’s deficit-reduction plan misrepresents the commission’s majority recommendation.

Obama is quoted in “The Price of Politics” telling author Bob Woodward that he didn’t endorse proposals from the commission led by former Senator Alan Simpson, a Republican, and former Bill Clinton White House chief of staff Erskine Bowles because they “involved eliminating the home mortgage deduction, health-care deduction, charitable deduction, etc.”

The commission’s proposal wouldn’t have eliminated the tax breaks, though it would have reduced their value to taxpayers.

“There are places where we disagreed with the commission’s recommendations, specifically where they gut the home mortgage interest, charitable giving, and health care deductions and risk additional tax increases on middle class families,” Amy Brundage, a White House spokeswoman, said in an e-mail response to a question about the discrepancy.

Roberton Williams, a senior fellow at the Tax Policy Center, a non-partisan Washington research group that examined the impact of the panel’s proposal on the tax break for homeowners, said “it would hardly be gutted” under the commission’s plan.

“Most middle-income households currently claiming the mortgage interest deduction would see a small tax increase but would retain most of the value of the deduction,” Williams said.

Tax Overhaul

The majority of the panel recommended an overhaul in the tax code that would have raised revenue while reducing tax rates. In order to accomplish that, it recommended cutting back tax breaks.

Though the panel offered two options on how the overhaul could be accomplished, it suggested leaving the decision on which breaks to eliminate to Congress and the president.

An “illustrative” option the panel included in its report would have scaled back the value of tax breaks for mortgage interest, employer-provided health care and charitable giving, though it wouldn’t have eliminated them. In addition to raising new revenue to lower the deficit, income tax rates would be lowered, with the maximum rate dropping to 28 percent from the current 35 percent.

‘Zero Option’

The panel also included a “zero option” in which all tax breaks were eliminated and the maximum tax rate lowered to 23 percent.

“The zero option was meant as a starting point for reform. You start there and add things back,” said Marc Goldwein, who was the commission’s associate director and is now senior policy director at the Committee for a Responsible Federal Budget, a Washington-based advocacy group.

The “illustrative” option, intended to provide an example of a workable package of changes to the tax code, would have altered the charitable and mortgage interest deductions to a 12 percent tax credit, reducing the value of the tax break to most. Taxpayers also only would have been allowed to deduct charitable contributions after they exceeded 2 percent of their adjusted gross income.

Health Care

Tax breaks for employer provided health care also would have been reduced, though not eliminated. The maximum value for employer provided health care would have been capped in 2014 at the 75 percentile of premiums, meaning the bottom three-quarters of taxpayers would have been allowed to exclude the full value of employer-paid coverage. For taxpayers whose employer-paid premiums were higher, they would have been taxed on the difference.

The value of the cap would then have been frozen and phased out entirely by 2038.

“I find it difficult to see a plan that would be politically palatable that reduced the rates significantly that didn’t go after these popular deductions,” Goldwein said. “Maybe you can get away with preserving one of them in its entirety but it’s hard to exempt more than one of them.”

To contact the reporter on this story: Mike Dorning in Washington at mdorning@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net

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