Federal taxes in fiscal year 2009 claimed the smallest share of GDP since 1950—14.9 percent according to the Congressional Budget Office (see top figure). The revenue drop has many causes: tax reductions in this year’s economic stimulus, the collapse of the economy, and the Bush tax cuts from earlier in the decade.

Revenues will rebound to higher levels over the next few years but how high they will go depends on what happens to tax policy. If Congress does nothing and current tax law plays out over the coming decade, revenues will jump in 2011 when most of the Bush tax cuts expire and the alternative minimum tax (AMT) hits more and more victims. By 2019, again according to CBO, taxes would claim 20 percent of GDP, well above the 1961-2008 average of 18.2 percent (see bottom figure).

The Obama administration asserts a different revenue baseline from current law. It would make the Bush tax cuts permanent, set the estate tax at 2009 levels (indexed for inflation), and permanently patch the AMT. Those changes would substantially reduce future revenues, leaving taxes at 18.0 percent of GDP in 2019, slightly below the long-run average.

In its 2010 budget, the administration proposes to raise taxes on high-income taxpayers by taking back the Bush tax cuts granted in its baseline and limiting the value of itemized deductions. Those actions would lift federal revenues starting in 2011 and boost 2019 taxes to 18.8 percent of GDP, a little more than the long-run average.

Strictly in terms of taxes, there’s nothing particularly right or wrong with any of the three future scenarios. Whether we’re above or below our 50-year average has no evaluative importance. What does matter, however, is that all three revenue paths fall far short of the 23.6 percent of GDP that CBO projects the government will spend in 2019. Maybe Congress and the president—and his successors—will manage to cut one-fifth of projected expenditures over the coming decade and balance the federal budget, but that’s a very tall order in the face of baby boomer retirements and soaring health costs. Reaching fiscal balance will take some combination of spending cuts and tax increases. What we don’t need is more tax cuts.

It is interesting, and perhaps worth noting, that while political opposition seems to be hardening against the $1 trillion, ten-year cost of the early versions of health reform, barely a peep of concern has been raised about the $3 trillion price tag for President Obama’s plan to extend most of the Bush-era tax cuts.    more »

President Obama took aim at multinational corporations last May at a press conference on international tax policy. I’ll leave out the details here, lest I put you to sleep or explode your brain. Let’s just say that the current system is a mess that drastically needs fundamental reform. Economists describe two contrasting “pure” approaches to taxing the income U.S. companies earn abroad. A “worldwide” approach would apply our domestic tax rules to all income (with a foreign tax credit to protect against double-taxation). In theory, that system would tax U.S. business income the same, whether it’s earned at home or overseas, so firms shouldn’t care where they invest. In contrast, under a “territorial” or “dividend exemption” system, the U.S. wouldn’t tax active business income earned overseas; American firms would pay only the taxes of the country where they earn income, just like any non-U.S. business operating there. In theory, that puts U.S. businesses that invest abroad on equal tax footing with foreign firms.    more »

Rosanne Altshuler and I have argued in recent posts that Washington will be hard pressed to close our ongoing budget gap with politically palatable tax increases. (Is that an oxymoron?) Neither raising the individual income tax nor boosting corporate levies will erase the deficit. But what about the spending side of the budget? We at the Tax Policy Center naturally focus on taxes but we do understand that cutting a dollar of spending has pretty much the same effect on the deficit as raising another dollar in taxes.    more »

Yesterday my colleague Bob Williams blogged on how difficult it will be to dig ourselves out of our enormous budget hole. He examined CBO’s biennial Budget Options report, which contains a list of “revenue options” for modifying Federal taxes. Bob focused on the year with the smallest deficit over the ten year budget window which happens to be 2012. In that year, CBO predicts we will run a deficit of “only” $633 billion. The individual income tax raises the bulk of federal revenues, so naturally Bob looked at incremental reforms of those levies.    more »

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.    more »

What would I do without The Wall Street Journal editorial page? I come to work on a slow summer’s day, not sure what I’m going to blog about, when I find this in the morning Journal: “A piece in The New York Times over the weekend declared in a headline that ‘the Rich Can’t Pay for Everything, Analysts Say.’ And it quoted Leonard Burman, a veteran of the Clinton Treasury who now runs the Brookings Tax Policy Center, as saying that ‘This idea that everything new that government provides ought to be paid for by the top 5%, that’s a basically unstable way of governing.’ They’re right, but where were they during the campaign?”    more »

Way back in the last century, PAYGO rules in the 1990 Budget Enforcement Act (BEA) helped control spending and contributed significantly to four years of budget surplus. Since BEA expired after 2002, looser PAYGO rules have applied and Congress has repeatedly chosen to ignore them. That was easy since violating PAYGO could only trigger a point of order, which was pretty easy to overcome, at least in the House. The Senate requires 60 votes to beat back a point of order but senators got around that by putting tax cuts and spending increases in budget resolutions, which are not subject to points of order.    more »

As Congress and the administration grope their way toward healthcare reform, a major obstacle is financing: how do we pay the $1 trillion cost over the next decade? Many economists and members of Congress favor reducing or eliminating the tax exclusion of premiums paid for employment-based health insurance (ESI). We owe no income or payroll tax on the premiums our employers pay. The exclusion will cut an estimated $240 billion from federal revenues next year and $3.5 trillion over ten years. And it hits state tax collections too.    more »

Congressional Democrats, having apparently lost patience with the first Obama stimulus, are beating the drum for yet another round of government money to pump up the still-lagging economy. They need to take a deep breath. Lori Montgomery wrote a nice piece in yesterday’s Washington Post explaining why. Using some data from Mark Zandi at Economy.com, Lori reports that barely $100 billion of last winter’s nearly $800 billion stimulus has made its way into the economy. Until the rest is spent, why would we want to run up the debt by hundreds of billions more?    more »

As I promised in last Friday’s TaxVox post, here is TPC’s estimate of the 2012 distribution of President Obama’s tax proposals in the 2009 budget, measured against the administration’s chosen baseline. That baseline looks a lot like current policy: extend the Bush tax cuts, index and make permanent the 2009 estate tax, and permanently patch the alternative minimum tax by indexing forward the 2009 parameters.    more »

Following last month’s release of the Treasury Green Book, the Tax Policy Center reworked its distributional analysis of the tax proposals in President Obama’s 2010 budget. We learned many new details about specific tax provisions, including the practical definition of who has enough income to face higher taxes. The bottom line? You have to have a lot of income to be in Obama’s crosshairs.    more »

Here we go again. I posted yesterday on a new TPC analysis of the tax cuts in President Obama’s proposed 2010 budget. The conclusion: Nearly everyone, even most of the very wealthy, would enjoy a big tax break. This, I suggested, was not smart, given the nation’s huge deficit and Obama’s ambitious priorities. Not surprisingly, a commenter—AMTbuff—called me to task. While many of these revenue provisions represent tax cuts relative to current law, they are not when compared to current policy—that is, assuming all the 2001 and 2003 tax cuts are made permanent, the AMT is patched into the future, etc. According to AMTbuff, “using current law as the baseline is misleading [since] neither the public nor any experts expect all tax rates to spring back to pre-2001 levels.”    more »

Everybody gets a tax cut! To look at TPC’s latest estimates of the tax provisions of President Obama’s 2010 budget, you’d think there was no deficit of $1.84 trillion, or that the White House has no need to pay for an ambitious health reform plan. Or more education spending. Or more infrastructure construction.    more »

After I wrote about how Obama’s tax proposals would cut taxes for many wealthy households, some readers objected that I’d ignored the fact that the alternative minimum tax (AMT) would wipe out any potential tax savings. I had commented that the AMT could, in fact, do just that, but TPC had not yet estimated how many taxpayers would be affected. Research assistant Katie Lim has now generated those estimates and they show, as expected, that the AMT would take the potential tax cut away from many people.    more »