Current Revenue Solutions Will Barely Reduce the Deficit

By :: December 7th, 2012

Despite the ideological hype over revenue increases for the upper-income taxpayers and restricting itemized tax deductions, almost all the considered changes will tackle only a portion of the deficit.

As the graph below indicates, the Congressional Budget Office projects a fiscal year 2015 deficit under current policy of $883 billion, not far from the $1 trillion–plus deficits in the Great Recession and its early aftermath. By comparison, the Tax Policy Center calculates that revenue gained from repealing ALL itemized deductions would be only $183 billion. Smaller limitations on itemized deductions have smaller effects: President Obama’s proposal to limit the value of itemized deductions to 28 percent would raise only $15 billion. Capping itemized deductions at $50,000 would raise $59 billion, or $38 billion if the charitable deduction was excluded.

The value of all individual tax expenditures is $1.161 trillion, even larger than the deficit. But most revenue proposals—particularly those confined to a tiny portion of taxpayers and only a subset of various tax programs—also only chip away at that amount.

Sources: CBO Budget and Economic Outlook, U.S. Treasury Green Book, and Urban-Brookings Tax Policy Center.
* Tax expenditures estimate excludes payroll tax effects.

Notes: Baseline is current policy, which assumes extension of 2001 and 2003 tax cuts, except for Individual Income Tax expenditures, which uses Treasury’s baseline.
Several proposals are circulating concerning the Buffett Rule, aimed to insure a 30 percent minimum effective tax on those making $1 million or more a year. The proposal scored by the Tax Policy Center would eliminate the AMT and replace it with a “fair share tax” styled on the Buffett rule. The “fair share” part would raise $22 billion in 2015 (the amount shown in the graph above), but repealing the AMT would lose $54 billion.

7Comments

  1. Michael Bindner  ::  3:52 pm on December 7th, 2012:

    Ending the recession was the biggest factor in starting to close the gap, but we must deal with both the housing crisis and become willing to tax most people just a little bit more for healthcare. Of course, if we shift from individual payroll taxes and withholding to employer or consumer based consumption taxes, rate increases can be accomplished with less opposition – which is why the Republicans oppose them.

  2. Wendy Stevens  ::  8:11 pm on December 7th, 2012:

    Michael Binder, it seems like you’re lumping all republicans into a category of opposing anything that would be helpful in eliminating the deficit. Am I misunderstanding your statement? It’s true that there are many fundamental disagreements about how to solve our countries problems, and what the problems really are. And generalizing towards partisan comments is neither true nor helpful. This is a complex problem that we all need to take responsibility for. And I agree with the sentiment that it’s going to take a lot more than tax increases and cuts. Like actual economically and psychologically sound policies that genuinely and sustainably promote economic growth.

  3. Vivian Darkbloom  ::  8:28 am on December 8th, 2012:

    One can easily agree with Mr. Steuerle’s conclusion: current proposals to raise revenue by increasing rates and limiting deductions fall far short of eliminating the deficit. That’s one very powerful reason to significantly cut spending.

    That said, Mr. Steuerle’s presentation of “the facts” is highly misleading.

    This article was ostensibly about revenue proposals that are currently proposed. Mainly, that would be the proposals based in President Obama’s 2013 budget, which the TPC has analyzed in some detail (see links above). Steuerle mentions that the proposal to limit “itemized deductions” to 28 percent would raise $15 billion in 2015. This is inaccurate and highly misleading. First, the proposal he refers to is not limited to “itemized deductions”—it includes quite a number of non-itemized deductions and exclusions such as employer-provided health care and certain retirement contributions for those earning more than $250K. In fact, the latter is where the bulk of the estimated revenue comes from. Second, given that the general sub-topic here is how much revenue would be made by “restricting itemized deductions”, Mr. Steuerle is remiss in failing to mention that one of the main revenue raising proposals in that 2013 budget is to re-introduce the PEP and Pease phase-out rules. The former phases out personal exemptions for high earners and the latter phases out itemized deductions for those high earners–up to 80 percent of the gross amount before phase-out. The proposed 28 percent limit comes *after* the Pease phase-out. According to administration revenue estimates (related elsewhere by the TPC) the Pease phase-out on itemized deductions would raise $584 billion over 10 years. That presumably is included in the President’s “high income provisions” in the above chart.

    In total, therefore, the amount proposed to be raised by the Obama budget from limiting tax expenditures solely on “the rich” is $749 billion over 10 years (per the administration’s own estimate). That’s a far cry from the $150 billion ($15 billion for one year) mentioned by Steuerle here. Contrast that with the $800 billion in reductions that Boehner recently proposed in the current fiscal cliff negotiations. The Obama team now is trying to argue that that is “impossible” despite the fact that the propose virtually the same number in their own budget. A $800 billion or even $749 billion addition to revenues won’t solve the deficit problem, but it”s a good start. The bulk of the rest will need to come from spending cuts.

    Why is this being obfuscated now by the administration and why is the TPC now helping them do that here rather than calling him out? That’s a question I wish they would address. That’s the TPC we deserve.

  4. Tax Roundup, 12/10/2012: Fund of Follies tax credits! « Roth & Company, P.C  ::  11:04 am on December 10th, 2012:

    […] Steurle,  Current Revenue Solutions Will Barely Reduce the Deficit.  […]

  5. KT  ::  11:37 am on December 10th, 2012:

    I’m not clear on where you’re getting that $800 billion from, but I do notice that you’re talking about revenue raised “over 10 years” whereas the graph above is giving revenue estimates for exactly one year, so you’re comparing apples to oranges.

    The estimates of Obama’s proposed high-income tax provisions come from Treasury, not TPC. See http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=2785&topic2ID=150&topic3ID=164&DocTypeID=5. They did include Pease and PEP.

  6. Vivian Darkbloom  ::  3:10 pm on December 10th, 2012:

    1. The $800 billion comes form this, among other sources:

    http://www.nytimes.com/2012/12/04/opinion/speaker-john-boehner-makes-an-offer.html

    2. You wrote: “The estimates of Obama’s proposed high-income tax provisions come from Treasury, not TPC.”

    But, I wrote this:

    “In total, therefore, the amount proposed to be raised by the Obama budget from limiting tax expenditures solely on “the rich” is $749 billion over 10 years (per the administration’s own estimate).”

    The Treasury is part of the Executive Branch.

    3. “I do notice that you’re talking about revenue raised “over 10 years” whereas the graph above is giving revenue estimates for exactly one year, so you’re comparing apples to oranges.”

    And, I wrote this:

    “That’s a far cry from the $150 billion ($15 billion for one year) mentioned by Steuerle here. (See also, “over ten years” under 2; above.

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