The voices of Tax Policy Center's researchers and staff
The Congressional Budget Office’s latest update, released today, provides a snapshot of fiscal policy in the short run, the medium term, and the long run. CBO disclosed its short-term analysis in May: If automatic spending cuts and tax increases kick in as scheduled at the end of the year, the U.S. could be thrown back into recession. Meanwhile, few quibble that in the long run, demographics and the continued rapid growth in medical costs will require spending that exceeds the capacity of our current tax system. CBO’s midterm projection, however, is more controversial. The agency warns that over the next decade, continuing temporary tax policies – in particular the 2001/03 personal income tax cuts – will lead to unsustainable levels of annual deficits and debt. But there is nothing inevitable about this excessively glum estimate. There is a far better alternative. What if Congress retained the level of taxation set by current law, but collected the money in a much smarter way? Of course, Congress could just do nothing. Allowing temporary tax policies to expire as scheduled would result in small and manageable federal deficits over the next ten years. However, many aspects of tax policy implied by “current law” are problematic—most notably, the Alternative Minimum Tax would hit an additional 50 million middle and upper-middle class households by 2022. There is a better way. In an article published yesterday in Tax Notes, Ed Kleinbard, former Chief of Staff of the Joint Committee on Taxation, and I present an alternative post-2012 personal income tax regime, the “Better Base Case”. Quite simply, the Better Base Case would raise the same level of revenue as the CBO’s current-law baseline, but in a way that addresses the most troubling aspects of reverting to the tax laws in place in 2000. Specifically, we would let the temporary tax cuts expire as scheduled under current law and then make the following changes:
- Limit the value of personal itemized deductions to 15 percent
- Permanently patch the alternative minimum tax (AMT)
- Retain the child tax credit at its 2012 level
- Tax qualified dividends at the same 20 percent maximum tax rate that applies to long-term capital gains
- Restore the estate tax to its 2009 form ($3.5M indexed exemption and a 45% rate)
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