Medicare, Taxes, Retirement Are Targets in Hearing

‘Looming debt crisis’ testimony looks at major changes

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At a hearing titled “Confronting the Looming Fiscal Crisis,” held by the Senate Committee on Finance on Tuesday, testimony focused on substantial changes to Medicare, the tax code and retirement. Among the proposals was changing the tax treatment of retirement plans.

Testimony from Pete Domenici, former Republican senator from New Mexico, and former Congressional Budget Office (CBO) director Alice Rivlin, who also headed of the Office of Management and Budget in the Clinton administration, addressed changes they said were needed to avoid the “fiscal cliff” approaching at the end of the year through automatic spending cuts and tax increases. The combination of massive changes has led the CBO to predict that lack of attention to the impending cuts and increases could put the U.S. into a recession in the first half of 2013.

In their joint testimony, Rivlin and Domenici advocated changes to Medicare that would create Medicare exchanges and limit government costs, as well as changing the way those costs are delivered. The two also proposed substantial changes to the tax code that included, among other things, raising additional revenue—something that was not popular with Republican attendees.

Rivlin and Domenici proposed a two-bracket tax structure of 15% and 28%, with no standard deduction or personal exemptions. The corporate tax rate would be reduced to 28%. Capital gains and dividends would be taxed as ordinary income, excluding the first $1,000 of realized net capital gains or losses.

The Earned Income Tax Credit (EITC) would be replaced by a flat refundable per-child tax credit of $1,600, which is higher than currently allowed, and a refundable earnings credit similar to the Making Work Pay credit.

In addition, itemized deductions would be replaced by a flat 15% refundable tax credit for charitable contributions and for up to $25,000 per year, not indexed, mortgage interest on a primary residence.

The deduction for state and local taxes would be eliminated. In addition, a flat 15% refundable tax credit or a deduction, for those in the higher bracket, for retirement savings account contributions—which would only be allowed up to 20% of earnings or a maximum of $20,000—was proposed.

Included in taxable income would be 100% of Social Security income, but with a nonrefundable credit for Social Security beneficiaries equal to 15% of the current standard deduction and a nonrefundable credit equal to 15% of an individual’s Social Security benefits.

The plan also proposes capping in 2015 and phasing out over the next 10 years the tax exclusion for employer-sponsored health insurance benefits; allowing the deduction of medical expenses in excess of 10% of adjusted gross income, the same as presently; and allowing a deduction of miscellaneous itemized deductions in excess of 5% of AGI.

The American Society of Pension Professionals & Actuaries (ASPPA) issued a statement against the proposed change in retirement savings account contributions, saying that it would cause a disproportionate amount of harm to the retirement savings of Americans.

Pointing out that the retirement savings tax incentive is a deferral, not a permanent exclusion, ASPPA said that data from the Employee Benefit Research Institute (EBRI) shows that reduced limits result in lower account balances at retirement for all income groups. ASPPA added that younger workers in the lowest income quartile in small-business plans would be hardest hit, and could expect a 14% reduction in account balances at Social Security normal retirement age if the proposal becomes law.

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