In recent years, deficits have reached historically high levels relative to the size of the economy, leading to concerns over fiscal sustainability in the long run. This report addresses revenue options, highlighting proposals made by the President's Fiscal Commission and the Debt Reduction Task Force. As a percentage of gross domestic product (GDP), revenues remain at historically low levels while spending remains elevated, contributing to budget deficits. After examining the current fiscal situation, this report analyzes current federal revenues. The United States currently raises most federal revenues through the individual income tax and payroll taxes. In recent months, a number of groups and individuals have issued proposals for deficit reduction. On September 19, 2011, President Obama submitted recommendations for deficit reduction to the Joint Select Committee on Deficit Reduction. The Congressional Budget Office (CBO) projects a FY2011 budget deficit of nearly $1.5 trillion, or 9.8% of GDP. Over the past three decades (1980 through 2010), the average budget deficit was 3% of GDP. Increasing federal deficits in 2009 and 2010 are largely attributable to the economic recession and subsequent policy responses. The low levels of individual and corporate income tax collections can be partially explained by the recession. Eliminating education tax incentives, however, could reduce economic efficiency. Individual Income Tax Reform

There are two broad options for generating additional revenues using the individual income tax. Second, additional tax revenues can be generated by eliminating various exemptions, deductions, and credits available under the current tax code (i.e., broaden the tax base). Details of the Fiscal Commission's tax proposals are compared to the tax proposals put forth by The Debt Reduction Task Force in Restoring America 's Future: Reviving the Economy, Cutting Spending and Debt, and Creating a Simple, Pro-Growth Tax System . The overall goal of the proposed reform is to broaden the base by reducing tax expenditures, allowing for lower tax rates, while still raising revenues for deficit reduction. If the Committee chooses to use a ratio of spending cuts to revenues similar to that of the Fiscal Commission, and considers the fact that $900 billion in deficit reduction has already been enacted in the form of spending cuts under the Budget Control Act of 2011, revenues may be used to generate roughly $550 billion to $650 billion in deficit reduction. The Debt Reduction Task Force's Proposal

Like the Fiscal Commission's proposal, the Debt Reduction Task Force's Proposal included comprehensive tax reform as part of a broader strategy for deficit reduction. Enhancing progressivity in the tax code was another objective. With respect to the individual income tax, the Debt Reduction Task Force's plan would eliminate most tax expenditures, eliminate the standard deduction and personal exemption, eliminate the AMT, and move from six tax brackets to two. Like the Fiscal Commission's proposal, the Debt Reduction Task Force's plan would raise additional revenues through the payroll tax, corporate tax, and excise taxes. Changes in the income tax system noted above were designed to address this concern. Unlike the Fiscal Commission and the Debt Reduction Task Force plans, the President's proposal does not propose comprehensive tax reform. Achieving fiscal sustainability, reducing the budget deficit, and bringing the national debt to sustainable levels, will likely involve some combination of spending and revenue measures. The majority of federal revenues are collected through the individual income tax system and through payroll taxes. A broader tax base could allow for lower tax rates, which may enhance economic efficiency. Tax reform was a substantial component of both proposals.
Tax reform and deficit reduction are two issues being considered by the 112th Congress. In recent months, a number of groups have published various plans for tackling the nation's growing deficits. On September 19, 2011, President Obama submitted recommendations to the Joint Select Committee for Deficit Reduction.
This report analyzes various revenue options for deficit reduction, highlighting proposals made by the President's Fiscal Commission, the Debt Reduction Task Force, and the President's proposal. Others, such as House Budget Committee Chairman Paul Ryan and the Obama Administration, have noted the importance of tax reform as part of deficit reduction plans. These plans, however, do not provide the same level of detail with respect to tax provisions as the Fiscal Commission, Debt Reduction Task Force, and President's proposal, and are therefore not reviewed in detail as part of this report.
Large budget deficits, rising national debt, and the growth of entitlement spending have raised questions regarding fiscal sustainability in the United States. The Congressional Budget Office (CBO) predicts a FY2011 budget deficit of nearly $1.5 trillion, or 9.8% of gross domestic product (GDP). Over the past three decades, budget deficits have averaged 3% of GDP. Large budget deficits have contributed to an increased level of federal debt, relative to the size of the economy. Increased debt levels are expected to lead to increased federal interest payments. If not addressed, the current fiscal situation could undermine economic growth.
Reducing federal deficits will likely require reductions in spending, increased federal revenues, or some combination of spending cuts and revenue increases. Federal revenues in 2009 and 2010, relative to the size of the economy, were low by historical standards. Reduced federal collections may be partially attributable to the weak economy and the fiscal policy response. Historically low individual income tax collections may also be partially explained by the 2001 and 2003 tax cuts. Spending through the tax code, via tax expenditures, also reduces federal revenues. The use of tax expenditures may undermine economic efficiency and equity in the tax code.
The primary sources of federal revenues are individual income taxes, payroll taxes, corporate income taxes, and excise taxes. Additional income tax revenues could be raised with a broader tax base, which could be achieved by eliminating various exemptions, credits, and deductions. A broader tax base could also allow for lower tax rates, without a loss in federal revenues. Broadening the tax base could enhance the economic efficiency of the tax system.
The Fiscal Commission, the Debt Reduction Task Force, and the President's proposal took different approaches in the tax reform components of their fiscal sustainability plans. The President's Fiscal Commission raised additional tax revenues primarily through comprehensive income tax reform. The Fiscal Commission chose to broaden the tax base, allowing for both lower tax rates and increased federal revenues. The Debt Reduction Task Force's proposal also recommended individual income tax reform. The individual income tax reforms recommended by the Debt Reduction Task Force were designed to enhance efficiency and increase progressivity in the income tax system. Additional revenues in the Debt Reduction Task Force's plan originate from the proposed 6.5% debt-reduction sales tax. The President's proposal does not propose comprehensive tax reform, but instead highlights various provisions that could be modified or eliminated to generate additional federal revenues.