Wednesday, December 5, 2012
Tax Foundation: Raising Revenue: The Least Worst Options:
With the fiscal cliff looming, lawmakers are looking for new revenues as a component of any bipartisan deal to reduce the federal deficit. While raising new revenues may be politically necessary to seal a deal, lawmakers must keep in mind that not all revenue raisers are equal. Some will have far more harmful economic consequences than others.
Indeed, after careful study, OECD economists have established a hierarchy of which taxes are most and least harmful for long-term economic growth. They determined that the corporate income tax is the most harmful for long-term economic growth, followed by high personal income taxes. Consumption taxes and property taxes were found to be less harmful to economic growth relative to taxes on capital and income.
Why this hierarchy? It is determined by which factors are most mobile and, thus, most sensitive to high tax rates. Capital is the most mobile factor in the economy and therefore most sensitive to a hike in tax rates. Naturally, land is the least mobile and less sensitive to high tax rates. This is not to say that high taxes won’t affect consumption and property patterns but their impact will simply be less than the impact of taxes on capital and income.
With these rules of thumb in mind, here is a short list of ways to raise new revenues ranking from least harmful to most harmful:
- (Least Harmful) Economic Growth
- Asset Sales or Require Government Sponsored Enterprises (GSEs) and Federally-Owned Businesses to Pay Federal Income Taxes
- User Fees and Leases
- Tax Certain Non-Taxed Business Activities
- Premium and Co-Pay Increases
- Federal Employee Contributions
- Sales/Excise Taxes
- Raising the Payroll Tax Rate and/or Raising the Wage Base to Which It Applies
- Raising the Alternative Minimum Tax and/or a "Buffett Rule"-Type Minimum Tax
- Allowing "Temporary" Expensing to Expire
- Raising Top Individual Income Tax Rates
- Raising the Tax Rate on Estates
- Raising Tax Rates on Capital Gains and Dividends
- (Most Harmful) Raising Corporate Income Tax Rates