In counting down to tax day, we’ve already shown that we don’t raise as much in revenue as we spend, and how this is partially the result of costly tax expenditures. Paring back some of those tax benefits can help us to raise more revenue, if we so choose; raising rates is another.
Increasingly, though, there has been discussion of implementing new types of taxes. Two oft-discussed options are a financial transactions tax (FTT), and an energy tax. (Another option, the value added tax (VAT), will be discussed here next week.).
Some economists have proposed an FTT as a way to discourage too much short-term trading, and to charge financial institutions for the potential cost of a future crisis. Revenue raised from such a tax is estimated to be as much as $150 billion a year. Critics say this is an unnecessary intrusion into free market activity, and in any case would be difficult to collect. An FTT would work best if applied internationally, meaning all countries would have to agree to it (no easy feat). Plus, there are risks that such a blunt instrument will hurt financial sector efficiency, too – the last thing we need now. Proponents think it’s a justified way to curb what they see as excessive and economically harmful speculation in financial transactions.
Energy taxes are also popular these days – both as a revenue raiser and as a way to curb greenhouse gas emissions. There are generally two types of energy taxes in today’s discourse – a direct tax based on carbon or a “cap and trade” regime. A carbon tax would impose a fee based on the estimated amount of emissions released into the air. A cap and trade solution sets a maximum on the amount of carbon allowed to be emitted, and then allow companies to buy and sell these pollution permits on an open market. If the government auctions – rather than freely distributes – initial permits, this regime would simulate a tax. The Congressional Budget Office estimates that either version could raise over $100 billion a year.
As we’ve written before projections show that future revenues are expected to be just under 20% of GDP, but federal spending is headed to well above 20%. A big chunk of that spending is slotted for mandatory programs. While there’s certainly a lot of savings in the federal budget to be found on the spending side of the ledger, it is very unlikely that this increasing gap can be closed by cutting spending alone. Any credible plan to get the country’s fiscal house in order is going to have to consider new sources of revenue as well. Along with the VAT, the two revenue streams discussed here are among the options. To add your two cents, take our deficit challenge and see if you can get our fiscal future in better shape without tapping the tax side of the budget.
