A Solution for the Debt Ceiling Debate?

Despite House Majority Leader Eric Cantor’s (R-VA) decision yesterday to withdraw from the Biden-led negotiations to avoid default, there is still hope in Washington that lawmakers can reach an agreement by August 2nd. In response to Cantor’s withdrawal from the talks, Derek Thompson -- a visiting fellow at CRFB -- wrote an interesting article [3] titled The Only Solution to the Budget Mess: Raising Revenues, Not Taxes. Derek asserts that halfway reasonable members of the Republican Party are willing to raise revenue as long as taxes are also not raised.

Derek highlights how tax expenditures have led to a gaping hole in federal revenue collection:

You can think of the tax code in two parts: (1) Tax rates take income out of the economy, and (2) tax spending "gives" money back. When you filed taxes this year, the IRS asked you to fork over a certain percentage of your income, but it also helped you reduce your tax bill. Got kids? Tax credit. Got business expenses? Deduct them. Got neither? That's okay, you can still claim personal exemptions and a host of other items that save you money.

These measures, formally called tax expenditures because they "spend" through the tax code, are used to encourage behavior we like. We like houses, so the government spends hundreds of billions of dollars subsidizing mortgage interest. We like health care, so Washington lets employers offer insurance to their workers tax-free. We offer subsidies to companies, to industries, and to consumers, because we think there is lots of behavior worth promoting by making it tax preferable. There are good things about using the tax code to encourage good behavior. But too much of a good thing makes a $1 trillion hole in the middle of our tax code.

CRFB continues to encourage lawmakers to end and reduce many of the current tax breaks because it will help set the budget towards a fiscally sustainable future, while also having the benefit of making the tax code simpler and fairer. Click here [4] to read a recent blog on how tax expenditures help the budget.

According to Derek, in order to avoid default and to reach a budget deal it is absolutely necessary to raise revenue without raising taxes:

To get a budget deal, we need Democrats. To keep Democrats, you need more revenue. To keep Republicans, you can't raise tax rates. There's really only one solution. Tax revenue will go up. Tax rates won't.

Many of the fiscal plans proposed by lawmakers, experts, and other groups over the last few months have relied on cutting back on tax expenditures to raise revenues and reduce deficits and debt. Check out our new comparison tool [5] to learn more about all the plans.