Domenici-Rivlin: Payroll Tax Holiday to Reduce Debt

Today, the Bipartisan Policy Center released its tax proposal to reduce the deficit and debt and put the country on a competitive footing for growth. This report, chaired by Pete Domenici and Alice Rivlin comes on the heels of the Simpson-Bowles recommendation of last week. A month ago, Gov. Mitch Daniels floated the concept of simplified sweeping tax reform with a VAT balanced by a flat income tax with a high deductible threshold. Could it be we are finally about to have the serious debate on tax policy that the country needs?
Last February, Rivlin testified to the Senate Budget Committee that: “…(O)ur tax system is extremely inefficient and complex. Part of the gap should be closed by reforming the federal tax system so that it produces more revenue with less drag on economic growth.”

Yesterday, ABC (Reuters) reported at the Wall Street Journal CEO Council conference in Washington that Rivlin hinted at the proposal being released today: “”We need a broad-based consumption tax. That is not politically popular, but at some point we are going to have to do it.”

In their joint Op/Ed in The Washington Post, today, Rivlin-Domenici propose: “To ensure a more robust recovery, we propose a one-year “payroll tax holiday” for 2011, suspending Social Security payroll taxes for employers and employees.” The proposal cuts corporate and individual tax rates and adds a 6.5 percent “debt-reduction sales tax.”

“…Restraining the debt can give us a leaner, more-effective government, a more efficient health system and a far simpler tax system more favorable to economic growth. Moreover, we can put the budget on a sustainable path without threatening the fragile recovery.”

This is a smart tax approach…reducing tax rates will cushion the introduction of the sales tax and the elimination of tax expenditures. The reduction in the employee portion of the payroll tax would more than offset the sales tax, and should make the new tax base marketable to the public and therefore politically viable.  President Obama would be well advised to back it.