Taxes

164 Ways to Reduce the Deficit

CRFB has released a new compendium of over 150 options to reduce mandatory spending and raise revenue. Despite declining in deficits in recent years, the debt is still projected to rise substantially over the long term. In addition, a series of upcoming Fiscal Speed Bumps will force lawmakers to make decisions about spending and revenue that could require large amounts of offsets, or potentially add almost $2 trillion to the debt.

Click here to see the full list of options.

Our list of options is meant to assist in finding fiscally responsible Speed Bump solutions, achieve some of the unspecified savings in the budget resolution, and help make the country's fiscal situation sustainable.

This paper updates and expands a health care and revenue options report released during the fiscal cliff discussions in late 2012. The new list also focuses on revenue and health care but also includes options for other mandatory (non-health, non-Social Security) spending that may be useful in the months ahead.

Let the Cadillac Tax Drive...Down Deficits and Health Care Spending

A group of House Democrats introduced a bill yesterday to repeal the tax on high-cost health insurance plans, commonly known as the "Cadillac tax," set to take effect in 2018. The repeal joins a similar House Republican bill released back in February. Needless to say, repealing the tax would be very expensive - CBO has estimated the tax raises $87 billion through 2025 while raising growing amounts over time - and likely counter-productive to health care cost control efforts. Importantly, the tax already seems to be having clear effects on the design of employer-provided health plans and has shown itself to be an important tool to slow private health spending growth (and may be playing a role in the recent slowdown). At the very least, lawmakers should plan to offset the lost revenue from repeal, but they should focus on policies that can also bend the health care cost curve.

The Cadillac tax is a 40 percent excise tax on employer-provided health insurance plan premiums that exceed $10,200 for individuals and $27,500 for families. Those thresholds are adjusted for inflation in future years so they would provide tighter limits over time since health care costs have almost always grown faster than inflation. As a result, it will raise growing amounts of revenue over time.

House and Senate Budgets Don't Balance in 2025 With Enacted Legislation

The House and Senate are going to a conference committee to reconcile the differences between their budget resolutions, but legislative developments may make reaching their goal of a balanced budget more difficult. Building off of the numbers laid out in their original budgets, neither the House nor Senate budget would get to balance by 2025 after accounting for legislation that has already passed each chamber. Budget conferees have the choice of either requiring that savings be identified to offset these new costs, or making their budgets only add up on paper, ignoring real costs that they intend to pass.

The one major bill with budgetary effects that passed both chambers is the Sustainable Growth Rate (SGR) replacement bill, now on its way to the President. Including interest, the bill increases 2015-2025 deficits by nearly $175 billion and increases 2024 and 2025 deficits by $17 billion per year. This deficit increase is enough to flip the Senate budget's $16 billion 2025 surplus to a $2 billion deficit.

The House budget did assume the cost of the SGR bill in their budget but assumed it would be paid for, so the budget would need to now find $290 billion of Medicare savings instead of the original $148 billion to stick to its numbers. Nonetheless, the SGR bill itself does not flip the budget to deficit in 2025.

However, the House has also passed $400 billion worth of tax cuts by reviving and continuing select tax extenders permanently and repealing the estate tax.

Ways & Means Committee Adds $270 Billion to Deficits by Repealing Estate Tax

The House Ways & Means Committee on Wednesday approved the “Death Tax Repeal Act of 2015,” which would permanently repeal the estate tax that applies to inheritances over $5.43 million. Repealing this tax would cost almost $270 billion over the next ten years, according to the Joint Committee on Taxation, or about $320 billion with interest. Since the bill does not include any offsetting revenue increases or spending cuts, the cost would be added to the national debt.

The bill repeals the estate tax on inheritances and its close cousin – the generation-skipping transfer tax.  The top rate on the gift tax, imposed on gifts of over $14,000 per person, is reduced from 40 percent to 35 percent. Since 99.8 percent of estates are worth less than the exemption amount, the $270 billion tax break would go to the wealthiest 0.2 percent of estates.

Rattner Testifies Before Senate Finance Committee on Tax Fairness

The Senate Finance Committee held a hearing Tuesday on how best to achieve "tax fairness" as a part of their larger focus on tax reform. Testifying before the committee included Steven Rattner, the chairman of Willett Advisors LLC and a current member of the steering committee for the Campaign to Fix the Debt. Rattner's testimony focused on using the tax code to address income inequality as well as the need to increase tax revenue to a level that makes the budget fiscally sustainable, principles shared by Fix the Debt's Case for Fundamental Tax Reform.

Also testifying before the committee were Dr. Lawrence Lindsey, President and CEO of the Lindsey Group; Deroy Murdock, Senior Fellow at the Atlas Network; and Dr. Heather Boushey, Executive Director of the Washington Center for Equitable Growth. Each witness came to the hearing with a different stance on how the tax code currently treats earners and how it ought to treat earners.

Rattner emphasized the tax code’s historical use as a way of alleviating income inequality. The decreasing marginal tax rate for top earners, the rampant exploitation of tax expenditures, and out-of-date corporate tax scheme all contribute to a code that fails to address adequately the changing circumstances among many Americans, according to Rattner. Despite his long career in the financial services sector, Rattner advocated increasing the capital gains tax rate, saying that he did not believe there would be any change in work ethic among his investment banking colleagues if there were a higher tax rate:

But in my 32 years on Wall Street, I have experienced top marginal Federal tax rates as high as 50% and as low as 28%, and I never detected any change in the motivation to work on the part of myself or any of my colleagues.

Business Tax Reform Chapter Lays Out Administration's Thinking

The Council of Economic Advisers released its 2015 Economic Report of the President last week, discussing several recent economic developments and how the President's policies fit into them. One chapter of particular interest given its possibility of being on the policy agenda in this Congress is on business tax reform. The chapter discusses the problems with the current system—notably, its high marginal tax rate, relatively narrow tax base, and economically distorting incentives—and how the President's approach would help the economy, productivity, and living standards.

For background, the Administration's policy on business tax reform can be summarized between the specific policies laid out in the budget, with additional detail in its business tax framework. The budget calls for the corporate tax rate to be reduced from 35 to 28 percent and extensions/expansions of some existing tax breaks, like a permanent extension of the R&E credit and new or extended tax breaks for clean energy. The budget also contains a number of revenue-raisers that would pay for them, including a 19 percent minimum tax for income earned abroad, the elimination of tax incentives for fossil fuel producers, and the changing of inventory accounting rules.

The revenue-raisers would pay for the tax breaks but would leave only $140 billion of revenue to pay for the rate cut, only about one-fifth that is needed. However, the framework states that additional revenue could come from addressing depreciation schedules and limiting the deductibility of interest. Finally, the budget dedicates revenue to the Highway Trust Fund from a 14 percent temporary tax on earnings held abroad by U.S. companies.

Components of President Obama's Business Tax Reform Plan
Policy Savings/Cost (-) Through 2025
Reform the international tax system $238 billion
Change inventory accounting rules $84 billion
Eliminate fossil fuel tax preferences $50 billion
Reform financial and insurance industry tax treatment $34 billion
Enact other revenue raisers $40 billion
Extend and expand R&E credit -$128 billion
Enact/extend small business tax cuts -$94 billion
Enact/extend manufacturing and clean energy incentives -$58 billion
Enact infrastructure and regional growth tax cuts -$26 billion
Total, Business Tax Reform Reserve $141 billion
Make unspecified changes to depreciation and interest deductions ~ $560 billion*
Cut corporate rate from 35% to 28% ~ -$700 billion
   
Implement 14% transition tax on earnings held abroad $268 billion
Dedicate revenue to Highway Trust Fund -$238 billion

Source: OMB, CBO, CRFB calculations
*Numbers represents roughly the additional revenue needed to finance the rate cut. Actual revenue may be larger since depreciation changes raise less in the long term than the short term

The chapter includes four interesting discussions of elements of business tax reform:

House Considers $320 Billion of Tax Cuts

The House of Representatives is considering this week whether to revive several tax breaks known as the "tax extenders" and add their cost to the deficit. The bills under consideration, which include extensions of previously renewed tax breaks in addition to new and expanded tax breaks, would cost almost $320 billion, or almost $385 billion with interest.

The tax extenders are a set of temporary tax breaks that have typically been continued for a year or two at a time. Most recently, about 55 extenders expired at the beginning of 2014 and were renewed retroactively for one year last December, before expiring a few weeks later at the end of 2014.

The House Ways & Means Committee today approved renewing and permanently extending two of these provisions, including a drastically expanded research tax credit and a deduction for sales taxes paid, as well as new modest expansions to 529 education savings accounts. The three approved bills being considered would cost about $225 billion, or $265 billion with interest.

The House is also voting today and tomorrow on permanent extensions of six more provisions, as well as a policy from last year's Tax Reform Act that would reduce taxes paid by private foundations on their investment income.

MY VIEW: Judd Gregg

Judd Gregg, a former Republican senator from New Hampshire, served as chairman of the Senate Budget Committee from 2005 to 2007 and ranking member from 2007 to 2011. He recently wrote an op-ed featured in The Hill. It is reposted here.

There is a growing consensus that one of the more fertile fields for possible bipartisan action between President Obama and this new Congress is tax reform.

This is logical.  

Nunes Offers a Way Forward for Business Tax Reform

With tax reform heating up, House Ways and Means member Rep. Devin Nunes (R-CA) has gotten the ball rolling with a business tax reform plan called the American Business Competitiveness Act. The draft would dramatically overhaul and simplify the corporate tax code, broadening the tax base in many areas while lowering tax rates on businesses.

Nunes's draft would change business taxation to be a cash-flow tax, making it more closely related to businesses' actual inflows and outflows. Nunes has said that the plan would be deficit-neutral over ten years using conventional scoring, although he has not made the estimate publicly available. The main elements of the plan include:

  • Reducing the top tax rate to 25 percent for both corporate and non-corporate businesses, phased in over ten years
  • Allowing businesses to write off the full cost of investments immediately (known as expensing) rather than writing them off over the life of the investment (see here for background on depreciation rules)
  • Repealing deductions for interest expenses while reducing taxes on interest income to the dividend rate (20 percent)
  • Eliminating other business deductions and credits
  • Changing the international tax system to a territorial system, where U.S. companies' income earned outside the country is not taxed by the federal government
  • Repealing the corporate Alternative Minimum Tax (AMT)

One of the most unique aspects of the proposal is the move to full expensing and the repeal of interest deductions.

Van Hollen Proposes Middle Class Tax Cuts

At an event at the Center for American Progress, House Budget Committee Ranking Member Chris Van Hollen (D-MD) unveiled an "Action Plan" to broadly cut taxes for the middle class. The reported $1.2 trillion cost of the plan would be offset with revenue from high earners and the financial sector. The details of the plan have not been completely spelled out yet, but it is encouraging that Van Hollen is committed to paying for the full costs. However, using increased revenues to pay for a middle class tax cut will make future deficit reduction more difficult.

Here are the major elements of Van Hollen's plan, including four parts that would cost money and three proposals to raise money.

Paycheck Bonus Tax Credit

The plan's centerpiece is a Paycheck Bonus Tax Credit, which would provide a $1,000 credit for single earners and $2,000 for couples. The credit would phase out at incomes of $100,000 and $200,000 indexed for inflation. Van Hollen indicated that the credit was not refundable, meaning that people with no income tax liability would not benefit, but that he intends to consider changes to make it at least partially refundable, which would be more expensive and provide more benefit to lower-income households. This credit is the plan's most expensive, potentially making up four-fifths of the plan's cost, depending on the exact details.

If taxpayers put at least half of their tax credit into a tax-preferred savings plan, they would qualify for an additional $250 Savers' Bonus credit.

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