The Limits of An All-Tax Solution
Tax Policy Center has a new paper out showing what tax rates would have to be in order to stabilize the debt at 60 percent of GDP in 2020, 2025, and 2035. The paper is similar to one they did two years ago, although that one had different fiscal targets.
TPC does these calculations relative to the two different baselines, current law and current policy. Current law takes official CBO projections, while current policy assumes that the 2001/2003 tax cuts are extended, the AMT is patched annually, and the many "tax extenders" are made permanent. With these two baselines, they also examine three different options for raising tax rates:
- Option 1 increases all income tax and capital gains and dividends rates
- Option 2 increases only the top three income tax brackets without changing capital gains and dividends rates
- Option 3 increases only the top two rates, again without changing capital gains and dividends rates
The table below shows what income tax rates would need to rise to in order to stabilize the debt at 60 percent of GDP in 2025.
| Individual Income Tax Rates, 2025 | |||||||
| Current Law | Current Policy | ||||||
| Current Rates |
Option 1 | Option 2 | Option 3 | Current Rates |
Option 1 | Option 2 | Option 3 |
| 15% | 16.5% | 15% | 15% | 10% | 15.7% | 10% | 10% |
| 15% | 16.5% | 15% | 15% | 15% | 23.5% | 15% | 15% |
| 28% | 30.8% | 28% | 28% | 25% | 39.2% | 25% | 25% |
| 31% | 34.1% | 38.7% | 31% | 28% | 43.9% | 73.4% | 28% |
| 36% | 39.6% | 44.9% | 47% | 33% | 51.7% | 86.5% | 96.2%* |
| 39.6% | 43.6% | 49.4% | 51.7% | 35% | 54.8% | 91.8% | 96.2%* |
*TPC finds that they are unable to achieve the target in this option. 96.2% represents the maximum income tax rate possible (when combined with the 3.8% HI tax).
In addition to the income tax rate changes above:
- Option 1 for current law would increase the top capital gains rate from 20 to around 26 percent (dividends are taxed as ordinary income under current law so they remain unchanged)
- Option 1 for current policy would increase the top capital gains and dividends rates from 15 to around 28 percent
The conclusions from this paper are pretty clear: putting our debt on a sustainable path solely by raising tax rates on high earners is extremely difficult, especially if lawmakers extend current policies and do not pay for them. In current law, tax rates must rise by about ten percent to reach the target, but tax rates must nearly triple to do so in Option 2 of current policy. In Option 3 of current policy, it literally becomes impossible to get debt down to 60 percent of GDP. Overall, though, even if revenue did get high enough to hit the target in one of those years, debt would assuredly grow after that because health care spending would grow much faster than revenue.
This is not to say that high earners should not pay more in taxes as part of a deficit reduction effort. The Fiscal Commission's Modified Zero plan provided a great example of a plan that can greatly improve the tax code, raise revenue, and make the system more progressive (see here and here for TPC distributional analyses of the plan).
