Raising Revenue: The Least Worst Options

December 10, 2012

As the fiscal cliff dominates discussions in Washington, lawmakers are looking for new sources of revenues in an effort to reach a bipartisan agreement to reduce the deficit, says Scott A. Hodge of the Tax Foundation.

However, some avenues of raising revenue are better than others. Organization for Economic Cooperation and Development economists have created a hierarchy that includes revenue raisers ranked from least harmful to most harmful in terms of long-term economic growth. Here is how they are ranked:

  • Economic growth.
  • Asset sales: As of 2008, the Office of Management and Budget (OMB) reported public lands worth $833 billion and loans worth $209 billion.
  • Require Government Sponsored Enterprises and federally owned businesses to pay federal income taxes.
  • User fees and leases for goods and services such as flood insurance, and opening up more public lands for oil and mineral leasing.
  • Tax certain non-taxed business activities such as credit unions, rural electric coops, nonprofit hospitals and certain types of insurance firms.
  • Premium and copay increases for Medicare.
  • Increase federal employee contributions to their health care and retirement costs.
  • Sales/excise taxes: Increasing current excises or creating a new one would not be costless, but less so compared to higher income taxes.
  • Base broadening by eliminating industry subsidies, targeted tax preferences and refundable credits; taxing employer-provided health care benefits; restoring the phase-outs of personal exemptions and itemized deductions for taxpayers with more than $250,000 in adjusted gross income (joint filers) and $200,000 (single filers); and capping deductions.
  • Raise the payroll tax rate and/or raise the wage base to which it applies.
  • Raise the Alternative Minimum, Tax and/or "Buffet Rule" type minimum tax.
  • Allow temporary expensing to expire.
  • Raise top individual income tax rates.
  • Raise tax rate on estates.
  • Raise tax rates on capital gains and dividends.
  • Raise corporate income taxes.

This list is determined by which factors are most mobile and sensitive to high tax rates. For example, capital is very mobile and likely to shift because it is sensitive to high tax rates, whereas land is not mobile and therefore not as sensitive to tax rates.

Source: Scott A. Hodge, "Raising Revenue: The Least Worst Options," Tax Foundation, December 5, 2012.

 

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