Deficit plan: no cause for snap investor decisions
WASHINGTON (Reuters) - There's no need for homeowners, investors, retirees, taxpayers or anyone else targeted in the controversial deficit-cutting plan unveiled on Wednesday to panic.
The proposal by the leaders of President Obama's deficit-reduction panel was shot down almost immediately by observers who believe it is too controversial and pain-spewing to be enacted anytime soon -- but its ideas may be under debate for years.
"I don't think there's anything in there that should prompt an investor to change anything they are doing with their money right now," says Michael Jackson of LECG, a global business advisory firm. "But some of their proposals could end up with renewed life."
The plan aims to cut as much as $4 trillion out of the deficit over 10 years, through a mix of everything from gasoline tax increases to Social Security benefit cuts to elimination of the tax deduction for mortgage interest.
Even if chairmen Erskine Bowles and Alan Simpson fail to get their package out of their own commission and to a vote in Congress, they may be changing the debate in a way that would eventually affect the household budgets of most Americans.
"The big picture is their conclusion that you've got to solve 30 percent of the deficit problem through tax increases of some kind," says Clint Stretch of Deloitte Tax. "That is not going to make people happy but it's probably realistic."
Tax hikes of some sort are one of the trends that could outlive the commission. Here are some others:
A FLATTER TAX
In the past, Congress has found tax-hiking most palatable when it cuts tax deductions and credits (termed tax expenditures) instead of raising rates. "There's no doubt that expenditures will be on the table," says Eugene Steuerle of the Urban Institute.
"That's what happened in 82, 84, 90 and 93." And that means that everything from the mortgage deduction to corporate tax breaks for employee health insurance could get nicked.
Even if deductions are not cut individually, they could be worth less if proponents of tax reform are successful and tax rates are lowered.
That could lower the value of items like whole life insurance to investors who benefit because the money earned in those policies is not taxed until it is withdrawn. "If I were deciding to buy a $2 million universal life policy, I'd think this could be a risk," says Charles Gabriel of Capital Alpha Partners, a policy analysis firm in Washington.
A LATER RETIREMENT
One of the most controversial pieces of the proposal would raise both the early and normal retirement ages. It would increase the full retirement age to 68 by 2050 and 69 by 2075. On the same schedule, it would also increase the early retirement age from 62 to 63 and then 64.
Those changes would definitely prompt more people to work longer, says Paul Van De Water of the Center on Budget and Policy Priorities. But that may be a trend that's happening anyway.
Steuerle says he sees the demand for older workers expanding steadily, and the move to squeeze an extra year or two of work in helps most people to a more comfortable retirement.
"Instead of 35 years of work and 25 years of retirement, you could have 36 years of work and 24 years of retirement," he said. "That could make a huge difference."
LESS OF A MORTGAGE INTEREST DEDUCTION
Although the tax write-off for mortgage interest has seemed sacrosanct, it has indeed been cut before.
Homeowners already cannot deduct interest for more than $1 million of home debt for two homes. And interest on home equity loans over $100,000 that are not plowed back into the homes is not deductible either.
Both could get shaved further as part of a grand deficit compromise. Often suggested is the possibility of limiting deductions for interest on mortgages used to buy vacation homes, or more limits on this deduction for the wealthy.
"At the margin, you have to think about it," says Gabriel. "If you're about to make a big investment in a home and really banking on being able to afford it because of the tax relief, you have to think that a couple of years down the road, that tax relief could be cut."
ANOTHER HEALTH INSURANCE HIT
Though the proposal essentially leaves the Obama health reform plan intact, it would eliminate the corporate deduction for health insurance provided to employees.
Layered on top of mandates that companies either provide health insurance or pay fines, "that could change the calculus" for employers, leading more of them to drop health benefits, says Van de Water, a senior fellow at the Center on Budget and Policy Priorities.
Even if the deduction doesn't disappear entirely, but simply becomes worth less in a flatter-tax environment, workers may find that by 2014 that they can find private insurance as good and inexpensively as they can get it at work.
(Editing by Jackie Frank)
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