Fiscal Solutions: Revenues Isabel Sawhill Senior Fellow, Economic Studies Program, Brookings September 2010

2 Major Options Let the Bush tax cuts expire Reform Income Taxes Tax Energy Tax Consumption Raise Payroll Taxes But revenues cannot be the entire solution; everything must be on the table

3 Let the Bush Tax Cuts Expire May need temporary extension »For Everyone »Only for Middle Class Cost of a permanent extension: $3 T Cost of a permanent extension just for the middle class: $2.3 T

4 Reform Income Taxes Current system is overly complex, inefficient, and discourages growth Existing deductions/preferences cost about $1 T a year; with broader base can raise revenue/lower rates Economists call these “tax expenditures” because they are the equivalent of back-door spending programs Largest are for health care, pensions, housing, state and local taxes but corporate subsidies also important

5 Tax Energy A triple winner: new revenues, energy security, slow climate change Cap and trade with auctioning of carbon permits is a variation on this theme Would encourage more production of alternative fuels as well as less consumption of carbon-based fuels with savings on subsidies to alternatives (e.g. ethanol)

6 Tax Consumption Most other countries rely heavily on taxing consumption (vs. income); use VAT Encourages saving; pro-growth Major critique: regressive, money machine To fix regressivity: exemptions, rebates To address money machine: dedicate to existing health care subsidies with any savings earmarked for deficit reduction and future rates tied to health spending

7 Raise Payroll Taxes Social Security very popular and payroll taxes the least controversial Raise earnings cap on Social Security payroll tax (currently $106,000) Tax more of the benefits as one way to move toward greater income-relating of benefits

8 The Budgeting for National Priorities Project On the Web