In a recent report, the Tax Policy Center (TPC) examined the medium and long-term deficit and possible remedies and came to the conclusion that the Republican proposal to solve the deficit problem through spending cuts alone is both unworkable and wrong
First, TPC notes that “achieving fiscal sustainability is …too big of a problem to be resolved on one side of the budget alone.” Additionally, the write, “the United States has never repaired a major budget shortfall solely through spending reduction. Budget discipline has been achieved only when imposed on both sides of the ledger.”
Second, the TPC says “there are also equity reasons to include tax increases in a deficit-reduction plan. In particular, tax increases are the only way to ensure that high-income households share in the burden. Spending cuts simply do not have a very big impact on high-income households. If the burden is to be shared equitably, high-income households will have to face higher tax burdens.”
While not completely rejecting the idea of raising income tax rates, the TPC notes that the top three tax rates would have to be raised from 28, 33, and 35 percent to 38.4, 45.2, and 48 percent to achieve a long-term sustainable debt/GDP ratio of 67 percent. If only the top two rates were increased, they would have to go to 72.4 and 76.8 percent respectively which says the TPC would likely spur “massive avoidance behavior and prove economically damaging.”
The TPC suggests that there are three better option to raising taxes: (1) Broaden the tax base by eliminating some or all of current tax expenditures, (2) Adopt a Value Added Tax, and/or (3) Impose a tax on carbon emissions and/or a higher tax on gasoline.
The TPC admits in its report that the latter two options, a Value Added Tax and/or carbon tax/higher gas tax, would be regressive, placing the most burden on middle-income and poor Americans. TPC offers several suggests concerning how the regressive nature of such taxes could be minimized. You can read about them in the full report.
Here, I want to discuss the TPC proposal for broaden the tax base since I believe that might be well worth considering along with a modest increase in the top income tax rates taking them back to the level they were prior to the Bush tax cuts.
As the TPC explains, “tax expenditures” refer to the assortment of various targeted provisions that reduce individual and corporate tax liability.” These are tax expenditures because they allow corporations and individuals to use a special exclusion, exemption, or deduction from gross income or special credit, preferred rate, or deferral of tax liability to reduce their taxes.
Revenue losses from tax expenditures are huge, amounting to an estimated $1.2 trillion in 2010. The three largest tax expenditures are for the mortgage interest deduction, the exclusion of employer contributions to health insurance premiums, and tax breaks for contributions to pensions, 401(k)s and individual retirement accounts (IRAs). In each case, these tax expenditures are “upside down” subsidies because they direct a larger share of benefits towards the wealthiest group in least need of a subsidy. For example, the mortgage interest deduction disproportionately benefits wealthier homeowners with larger mortgages. The exclusion of employer contributions to health insurance disproportionately benefits higher-income employees who choose the most expensive health insurance plans. Likewise, tax expenditures to contributions of pensions, etc. disproportionately benefit those who can afford to make the largest contributions.
TPC proposes three strategies for tax expenditure reform. First, eliminate tax expenditures completely. Second, convert tax expenditures that are deductions or exclusions into tax credits targeted to middle and lower income families. Third, limit the amount of deduction an individual or corporation could receive by for example, capping the exclusion for employer-provided health insurance.
Tax expenditure reform could raise significant additional revenues for deficit reduction without imposing an additional tax burden on those who can least afford more taxes. For example, TPC cites a Congressional Budget Office study showing that converting the mortgage interest deduction to a 15 percent tax credit would yield $400 billion in additional revenue over 10 years. Limiting the medical insurance exclusion to the medium premium level would raise $210 billion over the same time period.
I don’t agree with all of the Tax Policy Center’s proposals particularly those dealing with the Value Added Tax and carbon tax/gasoline tax increase. However, I do agree with the TPC that we need to look to the revenue side of our deficit crisis and not just focus on spending as the Republicans insist.
Fairness calls for a balanced spending AND revenue approach to deficit reduction. The Tax Policy Center proposal is a good start on finding a way to do that.
You can read the Tax Policy Center’s full report here: http://www.taxpolicycenter.org/UploadedPDF/1001539-Reforming-Taxes-Raising-Revenue.pdf
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