Double Taxation: A Take On All Things Taxes

Taking a Hard Look at the “Gang of Six’s” Deficit Reduction Plan and Its Impact on Your Tax Bill

With America’s collective attention justifiably focused on the Phillies’ quest to add a right-handed hitting outfielder and the outcome of Kim Kardashian’s lawsuit against her equally buxom doppelganger, few have noticed that the nation’s deficit currently stands at a robust $1.4 trillion.

Recently, the bipartisan Senate “Gang of Six” has proposed a plan that would slash the deficit while simultaneously reducing the collective tax bill of American taxpayers by $1.5 trillion, courtesy of an extensive overhaul of the Internal Revenue Code.

I’ll spare you much in the way of discussion regarding how these savings are determined, as they are computed off a baseline projection that assumes many of the current tax provisions — such as the reduced Bush-era tax rates and the AMT exemption — will disappear as currently planned at the end of 2012 and 2011, respectively. This is an important and unlikely assumption, as few believe these tax breaks would be abruptly removed from the tax landscape under any scenario.

Instead, let’s focus on what the proposal would actually mean to your tax bill. The “Gang of Six” plan would:

Although unstated in the proposal, popular opinion is that the plan would also offer the following:

As you can see, while the “Gang of Six” claims that these changes will reduce taxes, this is based off the highly unlikely assumption that our collective tax bill would have greatly increased without this proposal, as the Bush-era tax cuts and AMT patch would disappear. If you were to compare the proposal to a much more likely future baseline (extension of the Bush-era cuts, at least for those earning less than $250,000, and a continuation of the AMT patch), the changes proposed by the “Gang of Six” would likely increase taxes due to the removal of so many key deductions and credits.

Of course, the real winner should this proposal come to fruition is me, or if you’d prefer a less selfish perspective, tax advisors in general. Any overhaul of the tax code would add an element of job security for the number-crunching CPA crowd, as we’ll be charged with the unenviable task of understanding and implementing these dramatic changes to an already near-incomrehensible series of laws.

For more on the proposal, see here and here.