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Desperately Seeking Revenue

Rosanne Altshuler, Katherine Lim, Roberton Williams

Published: January 29, 2010
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The text below is an excerpt from the complete document. Read the full report in PDF format.

Abstract

In August 2009, the Congressional Budget Office (CBO) projected that the federal budget deficit would total $7.1 trillion over the 2010-2019 decade-under current law. That outcome would require the 2001 and 2003 tax cuts to sunset as scheduled in 2011 and Congress to stop "patching" the alternative minimum tax to minimize its bite. If neither of those things happens, CBO says the cumulative deficit over the decade would jump to $11.1 trillion, more than doubling the national debt. Our economy cannot sustain that rate of debt increase. How can we reverse it? This paper poses a simple question: could incremental reforms of the current tax system raise enough revenue to reduce the deficit to an average of 2 percent of GDP over the last five years of the budget window? We use the Urban-Brookings Tax Policy Center Tax Model to simulate several revenue-raising tax changes, including raising all income tax rates proportionally, hiking taxes only for high-income taxpayers, and either limiting or eliminating itemized deductions to broaden the tax base. We conclude that politically feasible tax increases within the current tax structure cannot generate sufficient revenues to bring federal budget deficits under control.


Introduction

In August 2009, the Congressional Budget Office (CBO, 2009) projected that the federal budget deficit would total $7.1 trillion over the 2010-2019 decade-under current law. That outcome would require the 2001 and 2003 tax cuts to sunset as scheduled in 2011 and Congress to stop "patching" the alternative minimum tax (AMT) to minimize its bite. If neither of those things happens, CBO says the cumulative deficit over the decade would jump to $11.1 trillion, more than doubling the national debt. CBO characterizes that situation as being unsustainable and it is hard to find anyone who would disagree.

At the same time, few policymakers want to raise taxes or cut government spending during the current recession, fearing that fiscal austerity would destroy our nascent economic recovery. As a result, any serious attempt to bring the federal budget into balance will likely wait at least a couple of years. In the interim, prudent budget policy would suggest that the president and Congress should focus on not making the situation worse by binding themselves or the nation to policies that preclude a concentrated attack on the nation's fiscal problems after the economy strengthens.

In principle, we could reduce the deficit by cutting spending or raising taxes. In practice, Congress has repeatedly failed to take the first course, even though doing so might have a less adverse effect on the economy than tax increases. Entrenched interests that benefit from current spending programs mobilize to protect their benefits and politicians seem loath to go against them. Congress takes nips and tucks around the edges but never seems to make the big cuts needed to make a serious dent in outlays. The tax route appears to face similar obstacles with a substantial number of members of Congress pledging never to vote to raise taxes and President Obama promising not to impose tax increases on families making less than $250,000 a year and single taxpayers making less than $200,000. Even so, over the past two decades, the president and Congress did increase revenues-in 1990 and 1993-and, with lots of help from a booming economy, the country ran a budget surplus for a few years at the turn of the century.

(End of excerpt. The entire report is available in PDF format.)