5 Reasons Why the “Supercommittee” Must Consider Tax Increases

August 3, 2011 at 1:14 pm

The congressional “supercommittee” that the debt limit deal establishes to recommend more deficit-reduction measures not only can consider revenue increases, but must consider them if it’s going to produce a balanced plan.  Here are five reasons why:

  1. President Bush’s tax cuts are a significant contributor to projected deficits, as this well-known chart shows. Letting the tax cuts expire would save up to $3.8 trillion over the next decade, not including the savings on interest payments on the national debt.Moreover, claims that we must extend the tax cuts to avoid seriously harming the economy are incorrect.  The Congressional Budget Office (CBO) has found that extending the tax cuts would be the least effective of all spending and tax options that CBO examined for boosting the weak economy and creating jobs.  CBO also pointed out that permanently extending the tax cuts without paying for them would, on balance, weaken economic growth in the long run because of the large increases in deficits it would produce.
  2. Higher-income people can and should share in the sacrifices needed to reduce long-term deficits. Elderly Medicare recipients, soldiers, working-class college students, and many others may have to take a seat at the budget-cutting table.  Basic fairness dictates that the most affluent people in the country take a seat as well.Over the past couple of decades, taxes on people at the very top have fallen dramatically, even as their incomes have soared.   Recent IRS data on the nation’s top 400 households — whose incomes averaged $270 million in 2008 — show that the average share of their incomes that they paid in federal taxes dropped from 26 percent to 18 percent between 1992 and 2008, while their annual incomes shot up by over 700 percent, after inflation (see chart).  Moreover, many high-income Americans, such as the group Patriotic Millionaires, are willing to help reduce deficits by paying more in taxes.
  3. Taxes are low both in historical terms and in comparison with other countries. While taxes have fallen disproportionately for high-income people, they also are at or near historically low levels for middle-class people, as we’ve explained.  That’s true whether you count just federal income taxes or all federal taxes, including payroll and excise taxes.  Moreover, the United States collects less in taxes than nearly any other developed country when measured as a share of the economy, according to data from the Organisation for Economic Co-operation and Development.
  4. A large chunk of federal spending takes place through the tax code. The federal government spends more than $1 trillion a year on “tax expenditures” — credits, deductions, and other targeted tax breaks.  That’s more than it spends on either Social Security or on Medicare and Medicaid combined.  There’s growing bipartisan interest in curtailing tax expenditures to help reduce deficits, and if done right, it could also make the tax code more efficient and equitable.  The bipartisan Bowles-Simpson commission, the Rivlin-Domenici task force, and the Senate “Gang of Six” have all recognized tax expenditure reform as a significant source of deficit reduction.  The “supercommittee” should do the same.
  5. Taking taxes off the table would force crippling cuts in entitlement programs. To achieve $1.2 trillion in savings over the next ten years (as the debt limit deal requires) from the spending side alone would require cutting an average of roughly $110 billion annually, starting in 2013.  That’s more than the federal government plans to spend each year on all of the following combined:  the FBI, the National Institutes of Health, the Centers for Disease Control and Prevention, Head Start, and Pell Grants to help students afford college.The large majority of the cuts would presumably come from entitlement programs, since Congress is making roughly $1 trillion in cuts in discretionary programs under the opening phase of the debt limit deal.  And, as we’ve noted :

    If the joint committee were only to cut entitlement programs to reach its target, how deep would those cuts be?  The deal that President Obama and Speaker Boehner were negotiating several weeks ago would have raised Medicare’s eligibility age, raised Medicare cost-sharing charges, shifted significant Medicaid costs to states, modified cost-of-living adjustments in Social Security and other benefit programs (and in the tax code), and instituted other entitlement savings.  Those steps would have saved $650 billion to $700 billion over ten years.  The joint committee would have to produce cuts twice as deep — and roughly twice as deep as those in the Gang of Six plan.

    Fortunately, the supercommittee can avert this outcome by including meaningful revenues in its deficit-reduction proposals.

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More About Chuck Marr

Chuck Marr

Chuck Marr is the Director of Federal Tax Policy at the Center on Budget and Policy Priorities.

Full bio | Blog Archive | Research archive at CBPP.org

5 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. 1

    You can’t simply cut Social Security. Cutting Social Security without also reducing the Social Security tax is simply theft. To boot, Social Security has nothing to do with any deficit as the program isn’t even allowed to run deficits, at worst the program will be unable to pay the promised benefits, but it will never add a dime to the deficit so saying that reforming Social Security is a part of dealing with the deficit is just completely bogus.

  2. Dave #
    2

    “Taking taxes off the table would force crippling cuts in entitlement programs”

    Here’s the problem with this line of argument:

    For most centrists and progressives, the problem is that there’s a budget deficit, and crippling cuts in entitlement programs is a possible albeit very nasty way to get rid of the deficit.

    For conservatives, though, it’s the other way around. The problem, in their mind, is that there are entitlement programs at all, and the last thing they’d want is to get rid of a way to force savage cuts in entitlement programs by fixing the budget deficit.

  3. Craig Skaggs #
    3

    We need to get over the debt drama that has threatened our country for the past couple of months and return to the problem at hand: jobs. There is a solution that could appease the most hard line party member.
    Every expert says the American economy is driven by consumer demand and that demand is being crushed by unemployment.
    There are approximately 14 million unemployed drawing unemployment compensation. Six million of the unemployed are long-term unemployed – those out of work 27 weeks or more. These people are the “hard core” unemployed who are quickly losing their work training and work ethic. This is the truly tough nut to crack.
    The January 2010 report from the Congressional Budget Office (CBO), looking at eleven ways to stimulate the economy, stated that the Bush tax cuts for families making over $250 thousand ranked dead last in its ability to stimulate the economy. Highest ranked in the CBO report was unemployment compensation expenditures.
    Why? The main reason is that those on unemployment compensation spend compensation money immediately on necessities. It isn’t money that is saved in any way. The wealthier families that receive extra money through the Bush tax cuts save that tax money.
    Using this logic, let’s revoke the Bush tax cuts, about $40 billion per year. For one year, use that money to supplement unemployment compensation in a positive way: to directly stimulate employment. Let’s allow employers to hire those on unemployment compensation and allow a significant portion of each new employee’s pay and benefits to be paid by unemployment compensation benefits, supplemented by the Bush tax cuts, for six months at a time.

    In that way, America’s real job creators will get their Bush tax cut money back. In particular, if they hire a highly trained person, to whom a higher pay scale is due, the job creator will get more money back. Those job creators who hire less expensive unemployed help would be training those employees to accelerate into higher paying jobs – thus gaining the job creator more money from the program if they accelerate the person’s training, value and pay.
    To assure that those hired are truly unemployed in the long-term sense, require any unemployed eligible for the pay supplement program to have been unemployed for four months or more.
    After a year, the $40 billion will be looked at again by policymakers to determine if the program should be continued or if some proportion, or all, of the money should go toward the deficit.
    So, what you have done is reduce unemployment; train and improve the workforce; set up employees for continued employment with their “job creator”; reduce today’s output for unemployment compensation “welfare”; put non-workers to work and develop an improved work ethic and self-worth.
    This approach also dramatically increases the number of taxpayers and jump starts the economy with a surge in new consumer demand. All this occurs without putting any more tax load on a large majority of the public while giving all the Bush tax cut money back to job creators.
    Everybody wins.
    – 30 –
    Craig Skaggs
    4542 Mill House Road
    Gulf Shores, AL 36542
    (304) 395-2629
    craigskaggs@peoplepc.com

  4. wkj #
    4

    Is there an easily accessible source showing what the CPI adjusted 2011 federal income tax rates and brackets would have been if the expiration of the Bush tax rate cuts had not been extended by Congress last year?

  5. Jay Trevari #
    5

    Prior to being fortujnate enough to hear Robert Greenstein speak at a GBPI conference in Atlanta in Jan, I was like millions of Americans who knew absolutely nothing about economics and how the economy works. But, I was hooked. I signed up for the newsletter, both CBPP’s and GBPI’s and I read them often. I don’t claim expertise in the subject, but now, I can recognize nonsense and am comfortable challenging it with actual facts and historical information. The point is, if a person is willing to pay attention and learn, that person can become informed and able to speak accurately on a very important topic.

    So thank you so much for presenting this information in a concise and understandable way.



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