How We Won’t Eliminate the Deficit
Last week the Congressional Budget Office issued a new edition of Budget Options, its biennial publication detailing hundreds of proposals that would raise or lower taxes and spending. Numbers in the revenue chapter of the nearly-300-page book show just how difficult it will be to raise the taxes needed to fill the huge deficit hole that we’ve dug for ourselves.
Back in June, CBO’s Analysis of the President’s Budget projected a $1.8 trillion deficit for 2009 and a cumulative $9.1 trillion deficit over the subsequent decade if Congress enacts the president’s budget proposals. The smallest annual deficit would occur in 2012—only $633 billion. And that ignores the fact that Congress has already given away 85 percent of projected revenues from the president’s cap-and-trade proposal and turned thumbs down on his proposed sources of revenue to fund healthcare reform.
Let’s focus on 2012, the easiest year, and look for revenue options to cover that year’s deficit.
How about boosting all income tax rates by one percentage point? JCT (it runs the tax numbers for CBO’s revenue proposals) estimates that move would yield just $44 billion in 2012, enough to fill about 7 percent of the budget hole. Quintuple the rate hike to 5 percentage points across the board and you might cover a third of the deficit—ignoring behavioral change and the political impossibility of getting that change through Congress.
How about going after itemized deductions? They disproportionately benefit the rich because tax savings are proportional to tax rates. One CBO option would limit their value to 15 percent—thus raising taxes on itemizers in tax brackets above that rate—and bring in nearly $130 billion in 2012, about a fifth of that year’s deficit. Given the howls with which Congress and lobbyists greeted President Obama’s proposed 28 percent cap on deductions, you can guess how popular this idea would be.
Maybe we could take a suggestion from President Bush’s tax reform panel—eliminate the deduction for state and local taxes. JCT says that will get you about $90 billion in 2012. It would also eliminate what amounts to a revenue sharing program for state and local governments at a time when their budgets are in worse shape than the federal fisc.
Of course, we can always go after today’s bad guys and tax carried interest as ordinary income. All but the die-hard anti-taxers might buy that one. And it would raise all of $3 billion in 2012.
It’s like the old joke about skimpy meals in bad restaurants: nobody likes the proposals and they aren’t big enough. There’s just not enough low-hanging tax fruit to wipe out the deficit.
So it’s back to the drawing board. How about another round of tax reform like in 1986? Or maybe it’s finally time to get serious about a VAT.