Options for Reducing the Deficit: Revenues

Posted by Janet Holtzblatt on
December 11, 2013

CBO recently published Options for Reducing the Deficit: 2014 to 2023. That report is now available in a fully digital version, so users can search the options according to major budget category, budget function, and major program category. The report included 36 options for raising revenues (apart from options primarily involving health); they are listed at the bottom of this post with estimates of their budgetary savings.

Trends in Revenues

In fiscal year 2013, the federal government collected $2.8 trillion in revenues. Individual income taxes were the largest source of revenues, accounting for 47 percent of the total. Social insurance taxes (primarily payroll taxes collected to support Social Security and Medicare) accounted for 34 percent, about 10 percent came from corporate income taxes, and other receipts—from excise taxes, estate and gift taxes, earnings of the Federal Reserve System, customs duties, and miscellaneous fees and fines—made up the remaining 9 percent.

In 2013, revenues equaled 16.7 percent of gross domestic product (GDP). Over the past 40 years, total federal revenues have averaged 17.4 percent of GDP—ranging from a high of 19.9 percent of GDP in 2000 to a low of 14.6 percent in 2009 and 2010 (see the figure below). The variation over time in total revenues as a percentage of GDP is primarily the result of fluctuations in receipts of individual income tax payments and, to a lesser extent, of fluctuations in collections of corporate income taxes.

Revenues, 1973 to 2023

Under current law, revenues as a share of the economy are projected to reach levels above the historical average—rising to 17.7 percent of GDP in 2014 and 18.6 percent in 2015, and then remaining above 18 percent of GDP from 2016 through 2023. About half of the expected increase in the next two years would stem from changes in tax rules. Accounting for the other half are factors related mainly to the strengthening economy. CBO projects that revenues will grow at close to the same rate as GDP over the 2015–2023 period. Individual income tax receipts are projected to rise relative to GDP as increases in taxpayers’ real income push more income into higher tax brackets; in contrast, corporate income tax receipts and remittances to the U.S. Treasury from the Federal Reserve are projected to fall relative to GDP.

Revenues would be greater if not for the more than 200 tax expenditures in the individual and corporate income tax system, which totaled more than $1 trillion in 2013, CBO estimates. Those tax expenditures—so called because they resemble federal spending to the extent that they provide financial assistance for specific activities, entities, or groups of people—include certain exclusions, deductions, exemptions, and credits in the individual and corporate income tax systems that cause revenues to be lower than they would be otherwise for any given schedule of tax rates.

Options

The 36 revenue options are grouped into several categories according to the part of the tax system they would target: individual income tax rates, the individual income tax base, individual income tax credits, payroll taxes, taxation of income from businesses and other entities, taxation of income from worldwide business activity, excise taxes, and other taxes and fees.

Revenue Options (Other than those primarily for health-related programs)

Option Number Title Savings, 2014–2023*
(Billions of Dollars)
1 Increase Individual Income Tax Rates 98 to 694
2 Implement a New Minimum Tax on Adjusted Gross Income 76
3 Raise the Tax Rates on Long-Term Capital Gains and Dividends by 2 Percentage Points 53
4 Use an Alternative Measure of Inflation to Index Some Parameters of the Tax Code 140
5 Convert the Mortgage Interest Deduction to a 15 Percent Tax Credit 52
6 Eliminate the Deduction for State and Local Taxes 954
7 Curtail the Deduction for Charitable Giving 212
8 Limit the Value of Itemized Deductions 71 to 146
9 Include Employer-Paid Premiums for Income Replacement Insurance in Employees’ Taxable Income 326
10 Include Investment Income From Life Insurance and Annuities in Taxable Income 210
11 Tax Carried Interest as Ordinary Income 17
12 Include All Income That U.S. Citizens Earn Abroad in Taxable Income 89
13 Tax Social Security and Railroad Retirement Benefits in the Same Way That Distributions From Defined Benefit Pensions Are Taxed 388
14 Further Limit Annual Contributions to Retirement Plans 89
15 Eliminate the Tax Exemption for New Qualified Private Activity Bonds 31
16 Eliminate Certain Tax Preferences for Education Expenses 155
17 Lower the Investment Income Limit for the Earned Income Tax Credit and Extend That Limit to the Refundable Portion of the Child Tax Credit 11
18 Increase the Maximum Taxable Earnings for the Social Security Payroll Tax 460
19 Expand Social Security Coverage to Include Newly Hired State and Local Government Employees 81
20 Increase the Payroll Tax Rate for Medicare Hospital Insurance by 1 Percentage Point 859
21 Tax All Pass-Through Business Owners Under SECA and Impose a Material Participation Standard 129
22 Increase Taxes That Finance the Federal Share of the Unemployment Insurance System 14 to 15
23 Increase Corporate Income Tax Rates by 1 Percentage Point 113
24 Repeal the “LIFO” and “Lower of Cost or Market” Inventory Accounting Methods 112
25 Repeal Certain Tax Preferences for Extractive Industries 34
26 Extend the Period for Depreciating the Cost of Certain Investments 272
27 Repeal the Deduction for Domestic Production Activities 192
28 Repeal the Low-Income Housing Tax Credit 41
29 Modify the Rules for the Sourcing of Income From Exports 6
30 Determine Foreign Tax Credits on a Pooling Basis 44
31 Increase Excise Taxes on Motor Fuels by 35 Cents and Index for Inflation 452
32 Increase All Taxes on Alcoholic Beverages to $16 per Proof Gallon 64
33 Impose a Tax on Financial Transactions 180
34 Impose a Fee on Large Financial Institutions 64
35 Impose a Tax on Emissions of Greenhouse Gases 1,060
36 Increase Federal Civilian Employees’ Contributions to Their Pensions 19

* For options primarily affecting mandatory spending or revenues, savings sometimes would derive from changes in both. When that is the case, the savings shown include effects on both mandatory spending and revenues.


Janet Holtzblatt is Chief of the Tax Policy Studies Unit in CBO's Tax Analysis Division. The options related to revenues are the result of work by various analysts at CBO, whose names can be found on the About the Document page. The staff of the Joint Committee on Taxation prepared the revenue estimates of nearly all of the options.