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CBO report on reducing budget deficits includes many revenue increase options

December 4, 2013

The Congressional Budget Office (CBO) has issued a report that projects the magnitude of future federal budget deficits and contains 103 options for reducing those deficits, including several options that involve revenue increases.

Background—the budget deficit in recent years and CBO’s budget deficit projections.The report notes that the economy’s gradual recovery from the 2007–2009 recession, the waning budgetary effects of policies enacted in response to the weak economy, and various changes to tax and spending policies—including the caps and automatic spending reductions put in place by the Budget Control Act of 2011—have resulted in the smallest budget deficit since 2008.The deficit in fiscal year 2013 was about 4% of gross domestic product (GDP), well below its peak of almost 10% in 2009.If current laws that govern taxes and spending remain generally unchanged, the deficit would continue to decline over the next few years.

However, budget deficits would gradually rise again under current law, CBO projects, mainly because of rising interest costs and increased spending for Social Security and the government’s major health care programs (Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies to be provided through health insurance exchanges).The agency expects interest rates to rebound in coming years from their current unusually low levels, sharply increasing the government’s cost of borrowing.In addition, the pressures of caring for an aging population, rising health care costs generally, and an expansion of federal subsidies for health insurance would cause spending for some of the largest federal programs to increase relative to GDP.

Further, CBO’s extended baseline that extrapolates those projections through 2038 shows a substantial imbalance in the federal budget over the long run, with annual revenues consistently falling short of annual outlays.

To put the federal budget on a sustainable long-term path, the CBO says that lawmakers would need to make significant policy changes—by allowing revenues to rise more than would occur under current law, reducing spending for large benefit programs to amounts below those currently projected, or adopting some combination of those approaches.

The CBO’s proposed options, in general.The CBO report contains 103 specific options for reducing budget deficits, divided into the following categories: mandatory spending, discretionary spending, revenue, and options related to health.It also contains a chapter on the budgetary implications of eliminating a cabinet department.The single largest dollar savings from nonrevenue options is a suggestion to convert various federal assistance programs for lower income people into smaller block grants to the states.There are also several large dollar suggestions that would involve decreasing Social Security benefits.

The CBO’s proposed revenue increases.The report contains 36 revenue-raising options, including:


…Increase individual income tax rates. The report includes separate proposals to raise all taxes on ordinary income by one percentage point, raise only the top four brackets by one percentage point, and raise only the top two brackets by one percentage point.
…Create a second alternative minimum tax equal to 30% of adjusted gross income less 28% of charitable contributions. It would apply to the extent it was higher than the existing AMT and also higher than the sum of individual income taxes owed by the taxpayer and the portion of payroll taxes he or she paid as an employee.
…Reduce tax preferences for employment-based health insurance. The report contains two ways of accomplishing this: (1) moving up the implementation of the excise tax, that is in the Affordable Care Act and is currently scheduled to go into effect in 2018, for employer-provided health benefits that are “too rich,” i.e., whose total value is greater than specified thresholds; and (2) limiting the deduction for payments for those benefits.
…Raise the tax rates on long-term capital gains and dividends by two percentage points.
…Convert the mortgage interest deduction to a 15% tax credit.
…Eliminate the individual income tax deduction for state and local taxes.
…Curtail the deduction for charitable giving.
…Limit the value of itemized deductions.
…Include investment income from life insurance and annuities in taxable income.
…Tax carried interest as ordinary income.
…Include all income that U.S. citizens earn abroad in taxable income.
…Tax Social Security and Railroad Retirement benefits in the same way that distributions from defined benefit pensions are taxed.
…Further limit annual contributions to retirement plans.
…Eliminate certain tax preferences for education expenses.
…Increase the maximum taxable earnings for the Social Security payroll tax.
…Tax all pass-through business owners under the Self Employment Contributions Act (SECA) and impose a material participation standard.
…Increase corporate income tax rates by one percentage point.
…Repeal the LIFO and lower-of-cost-or-market inventory accounting methods.
…Extend the period for depreciating the cost of certain investments.
…Repeal the domestic production activities deduction.
…Repeal the low-income housing tax credit.
…Modify the rules for the sourcing of income from exports.
…Determine foreign tax credits on a pooling basis.