A tax reform plan that would start over with a "blank slate" by eliminating all tax breaks and lowering tax rates for both individuals and corporations alike won the approval of Erskine Bowles on Monday, a former White House chief of staff to President Bill Clinton and current co-chairman of a deficit commission created by President Barack Obama to broker a bold, bipartisan deficit deal.
"Our tax code hasn't been reformed since 1986. That's 27 years," Bowles told CNBC's "Squawk Box." "I mean, just think about how the world has changed economically over the last 27 years and how the U.S.'s competitive position has changed during that time period, and think about the fact that money flows freely now and we have a tax code that is not only inefficient and ineffective, it's also globally anti-competitive."
The Senate's top Democratic and Republican tax-writers, namely Senate Finance Committee Chairman Max Baucus, D-Mont., and the committee's top Republican, Orrin Hatch of Utah, unveiled the plan last week. It calls for an unspecified, but potentially substantially lower tax rate for both individuals and corporations, though none of the current tax breaks would be included. Lawmakers would have to justify adding any tax breaks. Bowles said the plan is very similar to a proposal he had earlier made with debt commission co-chair Alan Simpson.
"Wipe out this $1.3 trillion of annual backdoor spending in the tax code. That's more than last year's deficit. But, wipe it off, start with a blank slate and force people to come forward with ideas as to what they'd add back," Bowles said. "The key thing is, you could use that $1.3 trillion to both reduce income tax rates on the corporate and individual level, making us much more globally competitive and you could use a small portion of it to reduce the deficit. That would make a huge difference."
Asked about potential push back to the elimination of popular tax breaks like the mortgage interest deduction, or business breaks such as the research and development tax credit, Bowles said people would have an opportunity to justify why any breaks should be added. Only tax breaks that increase economic growth or aid public policy should be considered, he said.
Bowles downplayed criticism that an end to the mortgage interest deduction would harm the housing industry. He argued that only 27 percent of taxpayers itemize deductions, rather than take the standard deduction, meaning most people don't even take advantage of the mortgage interest deduction. The deduction should be changed to a credit, he proposed. If capped at a $500,000 loan with 6 percent interest and the annual interest payment is $30,000, a 12 percent tax credit would amount to roughly $3,600.
"That actually would help a lot more people than the current mortgage interest reduction helps and it would save, you know, lots and lots of money for the taxpayers," he said.
Only time will tell if the Baucus-Hatch plan goes anywhere. The duo gave lawmakers until July 26 to make their arguments for putting various so-called tax expenditures into the bill. The goal is to pass a bill in this Congress, which ends at the close of the year.
—Reuters contributed to this report.