Citizens for Tax Justice, Addressing the Need for More Federal Revenue:
America is undertaxed, and the result is underfunding of public investments that would improve our economy and the overall welfare of Americans. Fortunately, Congress has several straightforward policy options to raise revenue, mostly by closing or limiting loopholes and special subsidies imbedded in the tax code that benefit wealthy individuals and profitable businesses.
Part I of this report explains why Congress needs to raise the overall amount of federal revenue collected. Contrary to many politicians’ claims, the United States is much less taxed than other countries, and wealthy individuals and corporations are particularly undertaxed. This means that lawmakers should eschew enacting laws that reduce revenue (including the temporary tax breaks that Congress extends every couple of years), and they should proactively enact new legislation that increases revenue available for public investments. Parts II, III, and IV of this report describe several policy options that would accomplish this. This information is summarized in the table to the right.
Even when lawmakers agree that the tax code should be changed, they often disagree about how much change is necessary. Some lawmakers oppose altering one or two provisions in the tax code, advocating instead for Congress to enact such changes as part of a sweeping reform that overhauls the entire tax system. Others regard sweeping reform as too politically difficult and want Congress to instead look for small reforms that raise whatever revenue is necessary to fund given initiatives.
The table to the right illustrates options that are compatible with both approaches. Under each of the three categories of reforms, some provisions are significant, meaning they are likely to happen only as part of a comprehensive tax reform or another major piece of legislation. Others are less significant, would raise a relatively small amount of revenue, and could be enacted in isolation to offset the costs of increased investment in (for example) infrastructure, nutrition, health or education.
For example, in the category of reforms affecting high-income individuals, Congress could raise $613 billion over 10 years by eliminating an enormous break in the personal income tax for capital gains income. This tax break allows wealthy investors like Warren Buffett to pay taxes at lower effective rates than many middle-class people. Or Congress could raise just $17 billion by addressing a loophole that allows wealthy fund managers like Mitt Romney to characterize the “carried interest” they earn as “capital gains.” Or Congress could raise $25 billion over ten years by closing a loophole used by Newt Gingrich and John Edwards to characterize some of their earned income as unearned income to avoid payroll taxes.
In the category of reforms affecting businesses, Congress could raise $428 billion by repealing accelerated depreciation. (This reform would also raise an additional $286 billion in the first decade, but this impact would be temporary.) Accelerated depreciation is the most significant break for domestic businesses and a major reason some companies can avoid paying taxes. Or Congress could take much less dramatic steps and repeal smaller breaks that benefits businesses, such as the domestic manufacturing deduction. Proponents of accelerated depreciation and the domestic manufacturing deduction claim that they encourage investment and job creation in the United States, but neither seems to be accomplishing this goal.
In the category of reforms affecting multinational corporations, Congress could raise $601 billion over 10 years by closing the huge loophole in the corporate income tax that allows U.S. corporations to indefinitely “defer” paying U.S. taxes on profits that they generate offshore or that appear to be generated offshore because of dodgy accounting methods. (This reform would also raise an additional $158 billion in the first decade, but this impact would be temporary.) Or Congress could raise smaller amounts of revenue by curbing the worst abuses of deferral. President Obama has put forward several proposals to do this by closing loopholes in the deferral rules, and several of these proposals have been introduced as legislation by members of Congress.
These are just a few examples among many that are described in more detail in this report.