Bye, bye tax breaks. Hello lower rates

WASHINGTON (CNNMoney) -- President Obama on Wednesday officially threw his weight behind an idea to revamp the way Americans currently pay their individual tax bills, getting rid of popular breaks to lower all income brackets.

In a speech at George Washington University in Washington, Obama talked about trimming$4 trillion from deficits in the next dozen years, in part by raising $1 trillion in taxes.

One big way Obama proposes to do this is by allowing the Bush-era tax cuts for the wealthiest Americans to lapse. He would also close corporate tax loopholes to increase the amount paid by companies that park profits offshore.

Another tool to trim deficits would be a major overhaul of the tax code -- eliminating or scaling back tax breaks for high earners, such as deductions for mortgage interest and charitable donations, to pay for an overall downward shift in tax rates.

"While I agree with the goals of many of these deductions, like home ownership or charitable giving, we cannot ignore the fact that they provide millionaires an average tax break of $75,000 while doing nothing for the typical middle-class family that doesn't itemize," Obama said.

The president's own Fiscal Commission, co-chaired by Erskine Bowles, a Democrat, and Alan Simpson, a Republican, suggested reining in deductions in December.

Under past Obama proposals, taxpayers in the 33% and 35% tax brackets would only be able to deduct their charitable contributions and mortgage interest payments at the 28% rate. It would affect those with taxable income of $250,000 and up, and bring in $321 billion over 10 years, according to the White House.

Proposals to eliminate those tax breaks have met with resistance in the past, especially from the housing industry and philanthropic groups, which worry about the impact on home sales and charitable giving.

The president's bipartisan debt commission detailed a few paths to tax reform. One -- called the "Zero Plan" -- would eliminate all tax breaks. Doing so would raise more than $1 trillion a year, the bulk of which would be used to pay for a steep reduction in individual and corporate rates.

Under that scenario, the commission would reduce the number of tax brackets for individuals from six to three, and set income tax rates at 8%, 14% and 23%. The 23% rate which would be a 12 percentage point drop from today's top rate.

The commission then offered two other, less extreme versions of the Zero Plan -- each of which adds back some tax breaks. In one case, they restore the earned income tax credit and the child tax credit, both of which benefit lower income households. Under that scenario, income tax rates would be 9%, 15% and 24%.

When they add back still more -- this time including limited versions of popular tax breaks on mortgage interest, health insurance, retirement savings and charitable giving -- the rates would still be lower than they are today. But they would be notably higher -- 12%, 22% and 28% -- than under the most extreme Zero Plan.