Fiscal Solutions: Revenues

Isabel Sawhill

Senior Fellow, Economic Studies Program, Brookings

September 2010

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Major Options• Let the Bush tax cuts expire

• Reform Income Taxes

• Tax Energy

• Tax Consumption

• Raise Payroll Taxes

• But revenues cannot be the entire solution; everything must be on the table

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Let the Bush Tax Cuts Expire• May need temporary extension

» For Everyone

» Only for Middle Class

• Cost of a permanent extension: $3 T

• Cost of a permanent extension just for the middle class: $2.3 T

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Reform Income Taxes• Current system is overly complex, inefficient,

and discourages growth

• Existing deductions/preferences cost about $1 T a year; with broader base can raise revenue/lower rates

• Economists call these “tax expenditures” because they are the equivalent of back-door spending programs

• Largest are for health care, pensions, housing, state and local taxes but corporate subsidies also important

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Tax Energy• A triple winner: new revenues, energy

security, slow climate change

• Cap and trade with auctioning of carbon permits is a variation on this theme

• Would encourage more production of alternative fuels as well as less consumption of carbon-based fuels with savings on subsidies to alternatives (e.g. ethanol)

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Tax Consumption• Most other countries rely heavily on taxing

consumption (vs. income); use VAT

• Encourages saving; pro-growth

• Major critique: regressive, money machine

• To fix regressivity: exemptions, rebates

• To address money machine: dedicate to existing health care subsidies with any savings earmarked for deficit reduction and future rates tied to health spending

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Raise Payroll Taxes• Social Security very popular and payroll

taxes the least controversial

• Raise earnings cap on Social Security payroll tax (currently $106,000)

• Tax more of the benefits as one way to move toward greater income-relating of benefits

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The Budgeting for National Priorities Project

www.brookings.edu/budget

On the Web