With rate hikes from businesses and individuals potentially out of the Build Back Better (BBB) ââreconciliation package, lawmakers are evaluating alternative options to increase revenue. Rather than proposing complicated changes to the tax base or untested proposals such as market valuation for billionaires, they should prioritize options that increase revenue while improving the structure of the tax code.
When seeking new tax revenue, lawmakers often immediately think of raising tax rates. But raising tax rates can have the most damaging economic effects, as it changes incentives to work, save or invest. Broadening the tax base can improve the structure of the tax code, often with much less damaging economic effects.
For example, the tax code is riddled with so-called tax expenditures, or spending through the tax code. While some expenses are important structural elements of the tax code, many are complicated and disproportionately benefit specific industries or households. Eliminating such provisions would be one of the least economically damaging ways to increase revenue.
On the business side, lawmakers could target spending that creates a level playing field across industries or sectors, such as exemptions for credit union income and interest on municipal bonds, and tax breaks for corporations. Blue Cross and Blue Shield. The Treasury Department estimates the cost of the three expenditures at $ 77.7 billion over 10 years. Note that the Treasury Department’s tax expenditure estimates are not revenue estimates, as the revenue generated by the repeal may be different after controlling for behavioral responses.
One of BBB’s goals is to fight climate change. To achieve this and increase revenues, lawmakers could replace the myriad of technology-specific, mostly temporary and ineffective tax credits with a carbon tax. From 2021 to 2030, energy production and energy investment credits are estimated at $ 115 billion, while a carbon tax starting at $ 25 per metric tonne of carbon could generate nearly $ 1 trillion on 10 years. Such a trade would generate significant revenues and tackle carbon emissions more effectively in a technologically neutral manner.
In Options to reform the US tax code 2.0, we estimated that eliminating all corporate tax expenditures unrelated to structurally important items like deferral, cost recovery, and foreign revenues would yield nearly $ 960 billion over 10 years while reducing economic output. 0.2%. The economic impact is limited because some expenses, such as technology-specific tax credits, provide an incentive to move from one activity to another rather than increasing overall activity, and others are temporary.
Lawmakers could also reassess the tax-exempt status of government-sponsored businesses (GSEs) and some businesses still classified as not-for-profit. Research suggests, for example, that non-profit hospitals do not appear to engage in more charitable activity than for-profit hospitals, which calls into question their tax-exempt status. Applying corporate tax to nonprofit hospitals could bring in nearly $ 40 billion over 10 years, while applying it to Fannie Mae and Freddie Mac, the Farm Credit System and the Tennessee Valley Authority could raise nearly $ 87 billion.
On the personal side, instead of expanding deductions that reduce the income tax base and disproportionately benefit high earners, lawmakers could limit them further. For example, eliminating the deduction for state and local taxes would bring in $ 1.6 trillion over 10 years on a conventional basis and eliminating the mortgage interest deduction would raise nearly $ 1.1 trillion. . A more modest move to lower the mortgage interest deduction limit to $ 500,000 in principal could bring in nearly $ 150 billion over 10 years.
A number of other exclusions reduce the income tax base and lead to significant distortions, such as the exclusion of interest on municipal bonds, which the Treasury says costs companies nearly $ 284 billion. individuals over 10 years.
By far the largest tax expenditure is the exclusion of employer-provided health insurance, which the Treasury Department estimates at $ 2.8 trillion over 10 years. Under current legislation, health insurance provided by employers is not included in taxable income, leading employees to prefer health insurance over regular wages as compensation. This distortion results in greater expenditure for overly comprehensive insurance schemes than would otherwise occur, and reduces tax revenues.
The most ambitious option to close the biggest hole in the income tax base would be to revoke the exclusion from employer-provided health insurance entirely. An alternative, however, would be to cap the amount that could be excluded, counting and taxing anything above the cap as ordinary income. This change would increase income while helping to contain health care costs.
As lawmakers assess alternative options to raise revenue, broaden the tax base, and eliminate tax expenditures unrelated to cost recovery, international taxes and deferral are good places to start. Rather than coming up with untested and complicated ways to increase income, changes that improve the structure of the tax code by making it simpler and more neutral across industries and households should be prioritized. Above all, lawmakers should avoid economically damaging increases in marginal tax rates.
Launch Resource Center: President Biden’s tax proposals
Was this page useful for you?
The Tax Foundation works hard to provide insightful analysis of tax policy. Our work depends on the support of members of the public like you. Would you consider contributing to our work?
Contribute to the Tax Foundation
Let us know how we can better serve you!
We are working hard to make our analysis as useful as possible. Would you consider telling us more about how we can do better?
Give us your feedback