Gang of 6 plan would raise taxes

Would your taxes go up or go down if the Gang of Six plan were adopted? That's the $1 trillion question.

That $1 trillion is the amount of new revenue in the 10-year deficit-reduction plan drafted by a bipartisan group of six U.S. senators. The rest of the plan to trim the deficit by $3.7 trillion would come from spending cuts.

This paragraph in the plan will interest you: "Reform, not eliminate, tax expenditures for health, charitable giving, homeownership, and retirement, and retain support for low-income workers and families." Yes, popular tax deductions like that for mortage interest would be on the table.

(Of course, nothing is certain here. President Obama and House Republicans are once again having talks on raising the debt ceiling and, The Washington Post reports, "According to congressional sources, Obama has apparently offered to forgo any tax increases in the initial deal, postponing an overhaul of the tax code until next year.")

But, just in case the Gang of Six plan remains in play, let's discuss what it could mean to your taxes. (On Wednesday, we looked at its proposed changes to Social Security and Medicare.) Warning: We're short on details here because the official plan outline (.pdf file), quite frankly, doesn't have many.

Post continues after video.

Fewer tax brackets. The plan proposes three (we now have six) and would lower the top rate -- and the corporate tax rate -- from 35% to a range of 23% to 29%. That would be great news for rich folks. "That could provide a windfall for wealthy taxpayers because the 35% tax bracket currently applies to taxable income above $379,150," said The Associated Press.

Mortgage interest. Upper-income folks might get a lower tax rate overall but they'd likely lose some of this popular deduction, which disproportionately provides tax relief for the well-to-do. (Want proof? Read this column at The New York Times.)

The details would be left to a Senate committee to hash out. MIT economist William Wheaton made this prediction to NPR:

Well, I suspect that the proposal most likely to emerge out of the Senate committee is one where the interest on second homes is eliminated, one where the total amount of mortgage debt will be capped at a lower level than the $1 million that it's currently capped at, and, rather than having an interest deduction where the deduction ranges from 15% all the way up to 38% for very wealthy Americans, will be a constant 10, 12 or 15% in the form of a tax credit.

Charitable contributions. Again, no details. However, Suzanne Perry notes at The Chronicle of Philanthropy that the president's debt commission "called for replacing the charitable deduction with a 12% tax credit. However, it would be available only for amounts donated beyond 2% of the taxpayer's adjusted gross income."

Health insurance. The health insurance benefit you get through work isn't taxed now, but it could be under this plan. (So-called Cadillac health care plans will be taxed, beginning in 2018, as part of health care reform.) Gerald McEntee, head of the American Federation of State, County, and Municipal Employees, said the Gang of Six plan "would destabilize employer-sponsored health care coverage for 160 million Americans."

Retirement savings. I don't know about you, but not paying taxes now on the money I put in an IRA and solo 401k is a huge incentive to save for retirement. Brian H. Graff, executive director of the American Society of Pension Professionals & Actuaries, commented: "Raising short-term revenues by reducing the tax deferral incentives created to provide retirement security for millions of American workers and retirees is not in the long-term interest of American workers or their children."

Repeal of the alternative minimum tax, commonly called the AMT. About 20 million Americans who would otherwise have to pay this tax already get a pass every year from Congress, so that won't make much difference to folks.  

Good news for families: The earned income tax credit and the child tax credit would be retained in some form or fashion.

All told, that's an estimated $1 trillion in extra revenue over 10 years, but also a tax break of $1.5 trillion, according to the Gang of Six. Confused? This Washington Post column explains how they can make that claim.)

Some think their numbers are way off. Marc A. Thiessen opined in The Washington Post that the Gang of Six plan would actually raise taxes by $3 billion over 10 years. He wrote:

Current law assumes that, over the next decade, taxes will go up by some $4.5 trillion because of tax cut expirations. The Gang of Six reduces this $4.5 trillion tax increase by $1.5 trillion -- and calls it a tax cut. But the practical result is really a $3 trillion tax increase over what Americans pay today.

More on MSN Money:

• Threats to Social Security, Medicare?
• What no new debt ceiling could mean to you
• The coming Social Security shortfall
• 3 debt solutions Uncle Sam doesn't have
• Fed preps for worst in US debt fight
• Would a US default mean disaster?