Desperately Seeking Revenue

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 Law January 15, 2010 Tax Policy Center Urban Institute and Brookings Institution

2. Budget deficits as far as the eye can see…

3. Projected Budget Deficit, 2009-2019(CBO, Current Law, August 2009) Billions ($) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

4. Projected Budget Deficit, 2009-2019(CBO, Current Law, August 2009) Billions ($) Cumulative 10-year deficit = $7.1 trillion 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

5. 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

6. Projected Budget Deficit, 2009-2019Administration baseline Billions ($) Cumulative 10-year deficit = $11.1 billion Cumulative 10-year deficit = $11.1 trillion 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

7. Projected Budget Deficit, 2009-2019Percentage of GDP % of GDP 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

8. 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

9. 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

10. Projected Budget Deficit, 2009-2019Percentage of GDP % of GDP 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

11. Projected Budget Deficit, 2009-2019Percentage of GDP % of GDP 2.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

12. Projected Budget Deficit, 2009-2019Percentage of GDP % of GDP 2.0 3.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

13. Projected Budget Deficit, 2009-2019Percentage of GDP % of GDP 2.0 3.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

14. 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

15. 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%

16. 2% Deficit Target: Current Law 2019

17. 2% Deficit Target: Current Law 2019

18. 2% Deficit Target: Current Law 2019

19. 2% Deficit Target: Current Law 2019

20. 2% Deficit Target: Administration Baseline 2019

21. 2% Deficit Target: Administration Baseline 2019

22. 2% Deficit Target: Administration Baseline 2019

23. 2% Deficit Target: Administration Baseline 2019

24. 3% Deficit Target: Current Law 2019

25. 3% Deficit Target: Current Law 2019

26. 3% Deficit Target: Current Law 2019

27. 3% Deficit Target: Current Law 2019

28. 3% Deficit Target: Administration Baseline 2019

29. 3% Deficit Target: Administration Baseline 2019

30. 3% Deficit Target: Administration Baseline 2019

31. 3% Deficit Target: Administration Baseline 2019

32. Tax units by statutory rates, 2019Current law baseline

33. Tax units by statutory rates, 2019 Administration baseline

34. 2% Target: Percent change in after-tax income Current Law, 2019 Current Law Baseline

35. 2% Target: Percent change in after-tax income Administration Baseline, 2019

36. Revenue effects of limiting or eliminating itemized deductions, 2019

37. 2% Target: Percent change in after-tax income Current Law Baseline, 2019 Administration Baseline

38. 2% Target: Percent change in after-tax income Administration Baseline, 2019

39. 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

40. 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