Why Current Revenue Proposals are Inadequate Compared to the DeficitPosted: December 5, 2012 Filed under: Shorts, Taxes and Budget 3 Comments »
Despite the ideological hype over revenue increases for the upper-income taxpayers and restricting itemized tax deductions, almost all the considered changes will tackle only a portion of the deficit.
As the graph below indicates, the Congressional Budget Office projects a fiscal year 2015 deficit under current policy of $883 billion, not far from the $1 trillion–plus deficits in the Great Recession and its early aftermath. By comparison, the Tax Policy Center calculates that revenue gained from repealing ALL itemized deductions would be only $183 billion. Smaller limitations on itemized deductions have smaller effects: President Obama’s proposal to limit the value of itemized deductions to 28 percent would raise only $15 billion. Capping itemized deductions at $50,000 would raise $59 billion, or $38 billion if the charitable deduction was excluded.
The value of all individual tax expenditures is $1.161 trillion, even larger than the deficit. But most revenue proposals—particularly those confined to a tiny portion of taxpayers and only a subset of various tax programs—also only chip away at that amount.
Sources: CBO Budget and Economic Outlook, U.S. Treasury Green Book, and Urban-Brookings Tax Policy Center.
* Tax expenditures estimate excludes payroll tax effects.
Notes: Baseline is current policy, which assumes extension of 2001 and 2003 tax cuts, except for Individual Income Tax expenditures, which uses Treasury’s baseline.
Several proposals are circulating concerning the Buffett Rule, aimed to insure a 30 percent minimum effective tax on those making $1 million or more a year. The proposal scored by the Tax Policy Center would eliminate the AMT and replace it with a “fair share tax” styled on the Buffett rule. The “fair share” part would raise $22 billion in 2015 (the amount shown in the graph above), but repealing the AMT would lose $54 billion.
But these are the revenue proposals we can implement now without hurting the recovery, because they don’t hit the bulk of consumers, and $110 billion towards a deficit of $883 billion is a big step. In truth we shouldn’t be narrowing the deficit now at all; we should increase it to stimulate the economy and save later. But if we are going to attack it prematurely, the President’s plan is least destructive to the fragile recovery.
Ending the recession was the biggest factor in starting to close the gap, but we must deal with both the housing crisis and become willing to tax most people just a little bit more for healthcare. Of course, if we shift from individual payroll taxes and withholding to employer or consumer based consumption taxes, rate increases can be accomplished with less opposition – which is why the Republicans oppose them.
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