What's on the menu? US long-term debt scenarios All tax cuts extended: AMT indexed to inflation; Netdebt to GOP, percent rs no Medicare reimbursement cuts 105 Cuts to discretionary and entitlement spending 100 Reld-McConnell, Phase | is Defense cuts, discretionary spending reductions - e A Top two brackets return te 2001 levels; phase- ae as wa out of itemized deductions; some discretionary oo anne © . s eid Pian ga renin cuts; Medicare reimbursement freeze - pet res. Budge i i i i ® ooh Bochner Plan» *— weighting), limit on femized deductions, "bracket &0 SoCs creep" (faster migration to higher tax brackets} 75 —__ All tax cuts return to 2001 levels; AMT no longer 70 See coins Dectoraproceedas pared 85 Tax rates lowered, combined with reduction in 2000 «20120 2093 SGT deductions to generate net tax revenue Increase: Source: CBO, news reports, Gang of Six praposal, J.P. Morgan Private Bank. cuts to discretionary and entitlement spending Ihave a feeling that revenue increases will be a material (e.g., 25% or more) part of the deal. The Peterson Foundation’s sampling of 6 policy groups shown below indicate that 5 of 6 recommend revenue increases compared to where we are today; the Heritage Foundation’s “Woody Guthrie Memorial Budget Plan’ is the only exception. What kind of revenue increases? Raising the top two brackets, which would affect joint filers with adjusted gross incomes above $212,300, would raise $450-$700 billion over 10 years (depending on whether you use OMB or CBO numbers). If they cannot agree to raise rates, another option (as in the Gang of Six plan) would be reductions in the deductibility of state and local taxes, sales taxes, mortgage interest, etc. As this gets sorted out, let’s hope everyone recognizes that the US tax system is already progressive. As shown in the chart below, effective Federal tax rates for low earners have dropped to zero over the last decade, even after including FICA taxes. News reports that the US tax system is regressive