November 13, 2013
OPTIONS FOR REDUCING THE DEFICIT: 2014 TO 2023

RevenuesOption 1

Increase Individual Income Tax Rates

(Billions of dollars) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014-2018 2014-2023
Change in Revenues                        
  Raise all tax rates on ordinary income by 1 percentage point 37 56 60 65 69 73 77 81 86 90 287 694
  Raise ordinary income tax rates in the following brackets by 1 percentage point: 28 percent and over 7 11 12 14 15 16 17 19 20 21 59 152
  Raise ordinary income tax rates in the following brackets by 1 percentage point: 35 percent and over 5 7 8 9 10 10 11 12 13 13 38 98

Source: Staff of the Joint Committee on Taxation.

Note: This option would take effect in January 2014. The estimates include the effects on outlays resulting from changes in refundable tax credits.

Under current law, ordinary income earned by most individuals is taxed at the following seven statutory rates: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent. (Ordinary income is all income subject to the income tax except long-term capital gains and dividends.)

As specified by the tax code, different statutory tax rates apply to different portions of people’s taxable ordinary income. (Taxable income generally equals gross income minus allowable adjustments, exemptions, and deductions.) Tax brackets—the income ranges to which the different rates apply—vary depending on taxpayers’ filing status (see the table below). In 2013, for example, a person filing singly with taxable income of $40,000 would pay a tax rate of 10 percent on the first $8,925 of taxable income, 15 percent on the next $27,325, and 25 percent on the remaining $3,750 of taxable income. The starting points for those income ranges are adjusted, or indexed, to increase with inflation each year.

Starting Points for Tax Brackets (2013 dollars)   Statutory Tax Rate on Ordinary Taxable Income (Percent)
Single Filers Joint Filers   2013
0 0   10
8,925 17,850   15
36,250 72,500   25
87,850 146,400   28
183,250 223,050   33
398,350 398,850   35
400,000 450,000   39.6

 

Income in the form of long-term capital gains and dividends is taxed under a separate rate schedule, with a maximum statutory rate of 20 percent. Income from both short-term and long-term capital gains and dividends, along with other investment income received by higher-income taxpayers, is also subject to an additional tax of 3.8 percent as a result of the Affordable Care Act.

Taxpayers who are subject to the alternative minimum tax (AMT) face statutory rates of 26 percent and 28 percent. (The AMT is a parallel income tax system with fewer exemptions, deductions, credits, and rates than the regular income tax. Households must calculate the amount they owe under both the AMT and the regular income tax and pay the larger of the two amounts.) However, the AMT does not affect most of the highest-income taxpayers because the highest statutory rate under the AMT is only 28 percent, and many deductions allowed under the regular income tax are still allowed under the AMT.

This option includes three alternative approaches for increasing statutory rates under the individual income tax. Those approaches are as follows:

  • Raise all tax rates on ordinary income (income subject to the regular rate schedule) by 1 percentage point.
  • Raise all tax rates on ordinary income in the top four brackets—28 percent and over—by 1 percentage point.
  • Raise all tax rates on ordinary income in the top two brackets—35 percent and over—by 1 percentage point.

Raising all statutory tax rates on ordinary income by 1 percentage point would increase revenues by a total of $694 billion from 2014 through 2023, according to estimates by the staff of the Joint Committee on Taxation (JCT). If this alternative was implemented, for example, the top rate of 39.6 percent would increase to 40.6 percent. Because the AMT would remain the same as under current law, some taxpayers would not face higher taxes under the option.

Alternatively, lawmakers could target specific individual income tax rates. For example, boosting rates only on ordinary income in the top four brackets—28 percent and over—by 1 percentage point would raise revenues by $152 billion over the 10-year period, according to JCT.

By targeting a smaller group of taxpayers than the first approach, this alternative would raise significantly less revenue. As another example, boosting rates only on ordinary income in the top two brackets—35 percent and over—by 1 percentage point would raise revenues by $98 billion over the 10-year period, according to JCT. Because most people who are subject to the top rate in the regular income tax are not subject to the alternative minimum tax, the AMT would not significantly limit the effect of that increase in regular tax rates. By targeting a smaller group of taxpayers than the first or second alternative, this alternative would raise even less revenue.

As a way to boost revenues, an increase in tax rates would offer some administrative advantages over other types of tax increases because it would require only minor changes to the current tax system. Rate hikes also would have drawbacks, however. Higher tax rates would reduce people’s incentive to work and save. In addition, they would encourage taxpayers to shift income from taxable to nontaxable forms (for example, by substituting tax-exempt bonds for other investments or opting for more tax-exempt fringe benefits instead of cash compensation) and to increase spending on tax-deductible items relative to other items (for example, by paying more in home mortgage interest and less for other things). In those ways, higher tax rates would cause economic resources to be allocated less efficiently than they would be under current law.

The estimates shown here incorporate the effect of taxpayers shifting income from taxable forms to nontaxable or tax-deferred forms. However, the estimates do not incorporate changes in how much people would work or save in response to higher tax rates. Such changes would depend in part on whether the federal government used the added tax revenues to reduce deficits or to finance increases in spending or cuts in other taxes.