The U.S. has a deficit problem. The Congressional Budget Office predicted that, if the U.S. maintains the current tax code, we will only produce annual revenue of 18 percent of gross domestic product -- thus running annual budget deficits of $800 billion. The bipartisan 2010 Simpson-Bowles Commission recommended that we deal with this imbalance by raising additional revenue of $2.2 trillion over the next ten years. We must increase taxes.
The Simpson-Bowles Commission argued that by increasing revenues to 20 percent of GDP we would achieve a balanced budget and stabilize the national debt.
Conceptually, that's not difficult. Changing individual marginal tax rates is now off the table, because the end-of-the-year "fiscal cliff" compromise locked in the Bush tax rates for all but those individuals making more than $400,000 per year -- whose rates increased to 39.6 percent. Nonetheless, there are many other sources of potential revenue. Here are the top ten ranked in order of the total revenue generated over a decade. [This list draws from research conducted by the Congressional Budget Office and the Center for American Progress.]
1. Tax fossil fuels ($1.179 trillion). A national carbon tax could be levied on all fossil fuels -- coal, natural gas, and oil. In September, the Congressional Research Service evaluated this alternative and found that a minimal carbon tax of "$20 per metric ton of carbon dioxide would generate approximately $88 billion in 2012, rising to $144 billion by 2020... this estimated revenue source would reduce the 10-year budget deficit by 50 percent." (In August, Australia enacted a carbon tax.) A U.S. carbon tax has the support of both environmentalists and business leaders (including Michael Bloomberg, New York Mayor, and Rex Tillerson, ExxonMobil CEO). It would be a rare political twofer that produces massive revenues while lowering emissions of carbon dioxide.
2. Limit itemized deductions for the wealthy ($521 billion). One of the problems with the current tax code is that itemized deduction are biased towards the wealthy; for example, a $10,000 mortgage deduction is worth $3960 for a high-income taxpayer but only $2,800 for a middle-income taxpayer. President Obama has proposed capping itemized deductions at a 28 percent rate. (During the presidential campaign, Mitt Romney proposed capping itemized deductions at $25,000 per household.)
3. Close tax loopholes that incentivize moving jobs overseas ($168 billion). During the first presidential debate, Obama said, "I also want to close those loopholes that are giving incentives for companies that are shipping jobs overseas." Romney replied, "Look, I've been in business for 25 years. I have no idea what you're talking about." Romney's answer was misleading as current law "allows a company that closes its American plant and moves manufacturing operations overseas to deduct that moving expense." There are similar proposed changes such as modifications to "transfer pricing" and "pooling of tax credits."
4. Eliminate corporate write-offs for meals and entertainment ($140 billion). Under current law if a businessperson takes someone out to dinner, and claims it for a business purpose, he or she can deduct half the cost of the meal.
5. Eliminate tax breaks for inventory accounting ($70 billion). Under current law, corporations get to choose the most favorable method for valuing inventory and cost of goods sold. Obama's proposed change would require all taxpayers to use the "first-in-first-out" method.
6. End special oil, coal, and gas tax breaks ($25 billion). The Obama Administration proposes ending twelve tax breaks for fossil-fuel companies including expensing of intangible drilling costs, expensing of coal exploration and developments costs, and percentage depletion for oil and natural gas wells and hard mineral fossil fuels.
7. Close the Mitt Romney loophole ($21 billion). The Romney loophole is the "carried interest" loophole that benefits private equity and hedge fund managers by allowing them to convert their income into capital gains that are taxed at a lower rate, 20 percent, than regular income, 39.6 percent.
8. Eliminate the "S Corporation" loophole ($11 billion). the Obama Administration proposes to close a loophole that lets wealthy individuals treat income as a shareholder distribution and thereby avoid paying the Medicare tax.
9. Deny mortgage deduction for vacation homes and yachts ($10 billion). Incredibly, large boats qualify as second homes if they contain sleeping accommodations, bathrooms, and kitchens. What's proposed is to deny the mortgage deduction for all second homes, whether on land or sea.
10. Eliminate tax subsidies for agribusiness ($10 billion). It's been proposed to eliminate capital gains treatment for agricultural items and expensing for certain agricultural planting costs.
These 10 actions generate $2.155 trillion and meet the Simpson-Bowles Commission revenue target. Only the first, taxing fossil fuels, would affect the average American -- and there are many ways to deal with this, such as giving rebates to rural Americans and those below a certain income level. The other nine actions apply either to corporations or wealthy individuals.
If we're serious about balancing the budget then we have to raise taxes in an equitable manner.