Post on 11-Jan-2016
1
Desperately Seeking Revenue
Rosanne Altshuler, Katherine Lim and Roberton Williams
Prepared for “Train Wreck: A Conference on America’s Looming Fiscal Crisis”
USC Gould School of LawJanuary 15, 2010
Tax Policy CenterTax Policy CenterUrban Institute and Brookings InstitutionUrban Institute and Brookings Institution
Budget deficits as far as the eye can see…
Projected Budget Deficit, 2009-2019(CBO, Current Law, August 2009)
Billions ($)
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Projected Budget Deficit, 2009-2019(CBO, Current Law, August 2009)
Billions ($)
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Cumulative 10-year deficit = $7.1 trillion
Is this a realistic scenario? Current law assumes
2001 and 2003 tax cuts sunset as scheduled in 2010 Congress stops “patching” the alternative minimum tax
Administration baseline assumes 2001 and 2003 tax cuts are extended Estate tax is maintained at 2009 parameters 2009 AMT patch is extended AMT exemption, rate bracket threshold and phase-out
exemption thresholds are indexed for inflation
Projected Budget Deficit, 2009-2019Administration baseline
Cumulative 10-year deficit = $11.1 billion
Billions ($)
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Cumulative 10-year deficit = $11.1 trillion
% of GDP
Projected Budget Deficit, 2009-2019 Percentage of GDP
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Can we bring federal budget deficits under control? We could cut spending or raise taxes Both routes face obstacles
Congress Members are reluctant to make the spending cuts needed to make a
serious dent in outlays A substantial number have pledged not to raise taxes
President Obama No tax increases on families making < $250,000 a year and single
taxpayers making < $200,000 But we have seen tax increases in the past two decades, so
maybe we could see increases towards the end of the current budget window
Our goal Won’t try to balance the budget! Examine tax increases that would reduce the average
deficit over the 2015-2019 period Two revenue goals
Reduce average deficit to 2% of GDP Sustainable in a growing economy since growth would reduce debt
as a share of GDP over time
Reduce average deficit to 3% of GDP “Administration” goal voiced by Peter Orszag in November 2009
% of GDP
Projected Budget Deficit, 2009-2019 Percentage of GDP
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
% of GDP
Projected Budget Deficit, 2009-2019 Percentage of GDP
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
2.0
% of GDP
Projected Budget Deficit, 2009-2019 Percentage of GDP
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
2.03.0
% of GDP
Projected Budget Deficit, 2009-2019 Percentage of GDP
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
2.03.0
Revenue targets, 2015-2019 2% revenue target
Current law baseline: Requires an increase of about 1.2 percent of GDP in every year
Administration baseline: Requires an increase of about 4 percent of GDP in every year
3% revenue target Current law: Requires an increase of only about 0.2 percent
of GDP in every year Administration baseline: Requires an increase of about 3
percent of GDP in every year
Alternative ways to increase revenues Raise individual income tax rates
Raise all rates proportionately (including rates on all capital gains and dividends)
Raise top three tax rates proportionately (but not on long-term capital gains)
Raise rates proportionately on single taxpayers with income over $200,000 and married couples filing jointly with income over $250,000 (but not on long-term capital gains)
Change treatment of itemized deductions Eliminate itemized deductions Limit value of itemized deductions to 15%
2% Deficit Target: Current Law2019
17
2% Deficit Target: Current Law2019
18
2% Deficit Target: Current Law2019
19
2% Deficit Target: Current Law2019
20
2% Deficit Target: Administration Baseline2019
21
2% Deficit Target: Administration Baseline2019
22
2% Deficit Target: Administration Baseline2019
23
2% Deficit Target: Administration Baseline2019
24
3% Deficit Target: Current Law2019
25
3% Deficit Target: Current Law2019
26
3% Deficit Target: Current Law2019
27
3% Deficit Target: Current Law2019
28
3% Deficit Target: Administration Baseline2019
29
3% Deficit Target: Administration Baseline2019
30
3% Deficit Target: Administration Baseline2019
31
3% Deficit Target: Administration Baseline2019
Tax units by statutory rates, 2019Current law baseline
0
5
10
15
20
25
30
35
40
Non-filers
0% 15% 26%(AMT)
28% 28%(AMT)
31% 36% 39.6%
Statutory Marginal Income Tax Rates
Percent of tax units Percent of cash income
Tax units by statutory rates, 2019 Administration baseline
0
5
10
15
20
25
30
35
40
Non-filers
0% 10% 15% 25% 26%(AMT)
28% 28%(AMT)
33% 35%
Statutory Marginal Income Tax Rates
Percent of tax units Percent of cash income
2% Target: Percent change in after-tax income
Current Law BaselineCurrent Law, 2019
2% Target: Percent change in after-tax income
Administration Baseline, 2019
Revenue effects of limiting or eliminating itemized deductions, 2019
Percentage of required revenue
Current law baseline
Administration baseline
Eliminate all itemized deductions
Reduce deficit to 2% of GDP 145 38
Reduce deficit to 3% of GDP 805 51
Limit value to 15%
Reduce deficit to 2% of GDP 81 21
Reduce deficit to 3% of GDP 451 28
2% Target: Percent change in after-tax income
Administration BaselineCurrent Law Baseline, 2019
2% Target: Percent change in after-tax income
Administration Baseline, 2019
How would taxpayers respond? We have ignored behavioral responses Likely to be large as a percent of revenue Likely to require larger tax increases once taken into
account
Conclusions None of the options provide a realistic approach to
reducing the deficit All would be progressive
Cutting spending could be regressive --- need to look at combined effects
All would generate potentially large efficiency costs Suggests that reducing the deficit to a sustainable
level will likely require either more comprehensive tax reform or tapping a new source of revenue