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Speaking in Chicago on September 6, Senate Whip Richard Durbin (D-IL) proposed a change in the plan to reduce spending starting January 1, 2013. Under the Budget Control Act of 2011, substantial spending cuts in both defense and Medicare providers will commence on that date. These cuts together with potential tax increases have been described as a "fiscal cliff" that could send the nation back into recession.

The spending cuts are required because the Joint Congressional Committee in 2011 was unable to agree on a budget and tax plan. The anticipated spending cuts are designed to reduce costs by $1.2 trillion over the next decade.

Sen. Durbin proposes delaying the spending cuts for a term of six months. The Budget Control Act would be modified to allow the Senate Finance Committee and the House Ways and Means Committee an opportunity to develop a new plan.

Under Durbin's proposal, the two committees must submit bills by June of 2013. The plans must total $4 trillion in budget savings. There would be $1.33 trillion in increased taxes and $2.67 trillion in budget reductions.

Following hearings by both committees, the bill would need to be submitted to a conference committee. After passage by both the House and the Senate, the $4 trillion plan could be signed by the President. If all of those steps were completed by June 30, 2013, the mandatory budget cuts would not take place. They would be replaced by the agreements for tax increases and budget cuts in the new law.

Editor's Note: The mandatory budget reductions in defense and Medicare take effect in 2013 because the Joint Congressional Committee was unable to agree on the balance of tax increases and budget reductions. There will be an opportunity for enacting new tax and budget provisions in the November session following the elections. Because the time is quite short for writing major legislation, many Senators and Representatives would like to defer action to 2013. However, there is a general reluctance to agree on the level of tax increases and budget reductions necessary for a compromise bill.

Tax Foundation Reviews Candidates' Tax Proposals

The nonpartisan Tax Foundation states that its goals for sound tax policy include, "simplicity, neutrality, transparency and stability."

It published a review on September 6, 2012 of three different major tax proposals. The review discussed the tax proposals of the National Commission on Fiscal Responsibility and Reform, co-chaired by Alan Simpson and Erskine Bowles, the proposals of President Obama and the proposals of Presidential Candidate Mitt Romney. The nonpartisan Tax Commission attempted to provide an objective comparison of the three proposals. It discussed proposals for income tax, capital gains tax, corporate tax and gas tax for each plan.

The National Commission on Fiscal Responsibility and Reform produced a plan in December of 2010. With nine Democrats and nine Republicans on the committee, the plan received 11 of 18 votes. However, it did not receive a sufficiently large majority to be submitted for a vote by the House and Senate.

The plan is commonly described as the "Simpson-Bowles" plan after the Republican and Democratic Co-Chairs of the Commission.

Simpson-Bowles proposes a 28% top rate on personal income taxes. Capital gains and corporations would also be taxed at 28%. Corporations would not pay tax on earnings overseas. The alternative minimum tax would be repealed. Taxes on gasoline would be increased from 18 cents to 23 cents per gallon.

With the reduction in the top income tax rate, most credits and deductions would be greatly limited. There would be a child credit, an earned income tax credit, a limited deduction for mortgage interest and deductions for health and retirement plans.

The principal goal of Simpson-Bowles is to reduce spending to 21% of gross domestic product (GDP) and to raise taxes to that same level. Simpson-Bowles is projected to balance the budget by 2037.

The Tax Foundation study of proposals by President Obama covered many of the same areas. The top income tax rate would be set at 39.6%. Long-term capital gains are taxed at 30% under the "Buffett Rule." Dividends are potentially taxed at the top rate of 39.6% plus the 3.8% additional tax under the Affordable Care Act. Corporate taxes for both U.S. and foreign profits are 28%. The alternative minimum tax is retained with the "Buffett Rule" level of 30%.

President Obama proposes retaining most credits and deductions with some technical changes. The benefit of deductions for the upper income brackets of 39.6% and 36% would be limited to the tax savings in the 28% bracket.

Presidential Candidate Mitt Romney proposes a top income tax rate of 28%. Capital gains would continue to be taxed at 15% and dividends at 15%. Corporate tax rates would be reduced to 25%, and foreign income would not be taxed. There would be substantial limits on credits and deductions. There would be limited deductions for home mortgage, charitable gifts, retirement plans and health plans. The alternative minimum tax would be repealed. Candidate Romney's plans are projected to balance the budget by 2020.

Editor's Note: This nonpartisan review by Dr. McBride and the Tax Foundation is offered as an educational service to our readers. Your editor and this organization take no position on the specific provisions that are involved. Our readers should recognize that with the complexity of our tax system, the comparison by Dr. McBride involves review of extensive information and a number of judgments on the various proposals.