Reducing the Budget Deficit:
Tax Policy Options
Molly F. Sherlock
Analyst in Economics
May 17, 2011
Congressional Research Service
7-5700
www.crs.gov
R41641
CRS Report for Congress
P
repared for Members and Committees of Congress

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Reducing the Budget Deficit: Tax Policy Options

Summary
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. Presently, the Senate “Gang of Six” and a new group comprised of Members of Congress
and led by Vice President Biden are formulating additional bipartisan deficit reduction proposals.
This report analyzes various revenue options for deficit reduction, highlighting proposals made
by the President’s Fiscal Commission and the Debt Reduction Task Force. Others, such as House
Budget Committee Chairman Paul Ryan and the Obama Administration, have noted the
importance of tax reform as part of a deficit reduction plans. These plans, however, do not
provide the same level of detail as the Fiscal Commission and Debt Reduction Task Force, 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.
There are other options for generating additional revenues outside of the current tax system. The
federal government could raise revenues through additional consumption taxes, excise taxes, or
by imposing a tax on carbon.
The President’s Fiscal Commission and the Debt Reduction Task Force 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.
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Reducing the Budget Deficit: Tax Policy Options

Contents
Introduction ................................................................................................................................ 1
The Current Fiscal Situation........................................................................................................ 2
The Budget Deficit................................................................................................................ 2
The National Debt and Interest Payments .............................................................................. 4
Macroeconomic Considerations ............................................................................................ 6
Federal Revenues ........................................................................................................................ 6
An Economic Framework for Evaluating Tax Reform Options .................................................... 9
Economic Efficiency and Tax Reform ................................................................................. 10
Equity and Tax Reform ....................................................................................................... 11
Options for Tax Reform ............................................................................................................ 11
Individual Income Tax Reform............................................................................................ 12
Social Insurance Tax Reform............................................................................................... 14
Corporate Tax Reform......................................................................................................... 15
Estate Tax Reform............................................................................................................... 18
Other Tax Options............................................................................................................... 18
Consumption Taxes....................................................................................................... 18
Carbon Tax ................................................................................................................... 20
Motor Fuel Excise Tax .................................................................................................. 20
Deficit Reduction Proposals ...................................................................................................... 21
The Fiscal Commission’s Proposal ...................................................................................... 22
The Debt Reduction Task Force’s Proposal.......................................................................... 26
Distributional Impacts......................................................................................................... 29
Concluding Remarks................................................................................................................. 31

Figures
Figure 1. Federal Budget Deficits/Surplus Relative to GDP ......................................................... 3
Figure 2. Federal Debt as a Percentage of GDP ........................................................................... 4
Figure 3. Net Interest as a Percentage of GDP ............................................................................. 5
Figure 4. Federal Receipts by Source .......................................................................................... 7
Figure 5. Federal Revenue as a Percentage of GDP ..................................................................... 8

Tables
Table 1. Achieving a Balanced Budget Through Tax Increases..................................................... 9
Table 2. Largest Individual Income Tax Expenditures: 2010 ...................................................... 12
Table 3. Largest Corporate Income Tax Expenditures: 2010....................................................... 16
Table 4. Taxing Consumption: International Comparison........................................................... 19
Table 5. Comparing Selected Deficit-Reduction Tax Proposals to Current Law.......................... 23
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Table 6. Revenues Generated Through Tax Provisions: The Fiscal Commission’s
Illustrative Proposal ............................................................................................................... 26
Table 7. Revenues Generated Through Tax Provisions: The Debt Reduction Task Force’s
Proposal................................................................................................................................. 28
Table 8. Distributional Impacts of the Fiscal Commission Proposal ........................................... 30
Table 9. Distributional Impacts of the Debt Reduction Task Force’s Plan................................... 31

Contacts
Author Contact Information ...................................................................................................... 32

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Reducing the Budget Deficit: Tax Policy Options

Introduction
The 112th Congress is currently considering various options for tax reform and deficit reduction.
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. A balanced approach to deficit
reduction could involve changes to both federal spending and revenues. This report addresses
revenue options, highlighting proposals made by the President’s Fiscal Commission and the Debt
Reduction Task Force. Both of these groups offered bipartisan proposals for deficit reduction that
provide a potential staring point for what is likely to be a process that involves many difficult
policy choices. In addition to changes in revenue policy geared toward deficit reduction,
fundamental tax reform has been an issue of interest in the 112th Congress. It is possible for tax
reform to complement deficit reduction goals.
This report begins by reviewing the current fiscal situation. As a percentage of gross domestic
product (GDP), revenues remain at historically low levels while spending remains elevated,
contributing to budget deficits. The budget deficit in FY2011 is projected to be nearly $1.5
trillion, or 9.8% of GDP. Further, in recent years, the share of the federal budget devoted to
mandatory spending has increased, making it difficult, if not impossible, for fiscal sustainability
to be achieved through cuts in discretionary spending alone. Large budget deficits continue to
contribute to a growing national debt, which, if left unchecked, could undermine future economic
growth.
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. Reforms to both types of taxes could result in additional revenues. Further, the
United States could generate additional revenue by reforming the corporate income tax, levying
additional consumption taxes, or by increasing excise taxes on certain items (e.g., gasoline,
alcohol), among other options.
In recent months, a number of groups and individuals have issued proposals for deficit reduction.
This report provides a comparison of the tax reforms suggested in two of these proposals, the
President’s Fiscal Commission and the Debt Reduction Task Force. These two were chosen as
each provided comparable specifics with respect to tax reform.
In addition to the Fiscal Commission and Debt Reduction Task Force plans, notable deficit
reduction plans have been released by congressional leadership and the Administration. In April,
2011, Representative Paul Ryan, chairman of the House Committee on the Budget released “The
Path to Prosperity: Restoring America’s Promise.”1 This document accompanies the House-
passed FY2012 budget resolution, H.Con.Res. 34. Chairman Ryan’s “Path to Prosperity”
proposes to reduce budget deficits and stabilize national debt using a combined strategy,
including spending cuts, entitlement reforms (specifically, Medicare), and tax reforms. The “Path
to Prosperity” suggests simplifying the tax code by reducing rates and eliminating tax
expenditures. Specifics regarding which tax expenditures would be eliminated were not provided.

1 The Path to Prosperity is available on the House Committee on the Budget website, at http://budget.house.gov/
fy2012budget/.
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The Administration has also outlined a broad framework for deficit reduction, in a fact sheet titled
“The President’s Framework for Shared Prosperity and Shared Fiscal Responsibility.”2 The
President also supports eliminating tax expenditures. Eliminating tax expenditures might allow
for reduced rates or deficit reduction. The Administration’s proposal does not provide specifics
regarding which tax expenditure provisions would be eliminated.3 The Administration also notes
that reforms to Social Security should be considered. This potentially could include changes to
the payroll tax base, however, specifics were not provided.
Additionally, other groups, including the Senate “Gang of Six” and a new group comprised of
Members of Congress and led by Vice President Biden, are formulating additional bipartisan
deficit reduction proposals.
The Current Fiscal Situation
Several factors contribute to the current fiscal situation. First, there are historically large budget
deficits. Bringing down budget deficits could involve reducing spending, increasing revenues, or
both. Second, these large budget deficits are contributing to a growing national debt. If these
deficits and the debt are not addressed, there may be macroeconomic consequences. The
following sections address these factors in turn.
The Budget Deficit
The U.S. federal budget deficit has increased relative to historical levels.4 In recent decades,
budget deficits have rarely exceeded 5% of GDP. The FY2010 budget deficit was $1.3 trillion, or
8.9% of GDP. The Congressional Budget Office (CBO) projects a FY2011 budget deficit of
nearly $1.5 trillion, or 9.8% of GDP.5 The Office of Management and Budget (OMB) projects
budget deficits rising to $1.6 trillion, or 10.9% of GDP. 6
Over the past three decades (1980 through 2010), the average budget deficit was 3% of GDP.7
Figure 1 illustrates outlays, receipts, and deficits as a percentage of GDP. In years where outlays
exceed revenues, the federal government runs a budget deficit. As can be seen in Figure 1,
outlays have increased while revenues have decreased, relative to GDP, in recent years. The
increase in federal outlays coupled with a decrease in federal receipts has led to a rising budget
deficit.

2 The White House, “FACT SHEET: The President’s Framework for Shared Prosperity and Shared Fiscal
Responsibility,” press release, April 13, 2011, http://www.whitehouse.gov/the-press-office/2011/04/13/fact-sheet-
presidents-framework-shared-prosperity-and-shared-fiscal-resp.
3 The Administration has outlined a number of tax expenditure provisions that could be eliminated in the FY2012
Budget Proposal.
4 The budget deficit (or surplus) is the difference between federal revenues (i.e., taxes and fees) collected and
government outlays (i.e., spending).
5 The Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2011 to 2021, Washington, DC,
January 2011, http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf.
6 The Office of Management and Budget, The President’s Budget for Fiscal Year 2012, Washington , DC, February
14, 2011, http://www.whitehouse.gov/omb/budget [henceforth cited as the President’s FY2012 Budget].
7 This figure is the simple average of deficits or surpluses as reported in the President’s FY2012 Budget, Historical
Tables, Table 1.2.
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Figure 1. Federal Budget Deficits/Surplus Relative to GDP
1970 - 2010
25
Outlays
20
Receipts
15
P
D
G
10
of
ge
ta
n
e
5
rc
Surplus
Pe
0
-5
Deficit
-10
970
972
974
976
978
980
982
984
986
988
990
992
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996
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1
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2

Source: CRS graphic using data from the President’s FY2012 Budget, Historical Tables, Table 1.2.
Federal spending consists of mandatory spending, discretionary spending, and net interest
payments. Generally, mandatory spending includes spending on entitlement programs and
spending controlled by laws other than annual appropriations acts.8 Discretionary spending is the
portion of spending controlled by annual appropriations legislation.9 Net interest includes the
government’s interest payments on debt held by the public, offset by interest income the
government receives through loans made and investments.
Over the past few decades, mandatory spending has grown to dominate federal outlays. In
FY2010, mandatory spending was 55% of total outlays, or $1,913 billion.10 In FY1980,
mandatory spending was 44% of total outlays. Discretionary spending as a percentage of total
outlays was 39% in FY2010, or $1,347 billion. Discretionary spending as a percentage of total
outlays was 47% in FY1980. Discretionary spending can be further decomposed into defense-
related and non-defense-related discretionary spending. In FY2010, non-defense discretionary
spending was $658 billion, a sum equal to 49% of discretionary spending or 19% of total federal
outlays. Non-defense discretionary spending was 24% of total outlays in 1980. Eliminating the
FY2010 budget deficit using only cuts in discretionary spending would have required eliminating
all discretionary spending, including defense-related discretionary spending.

8 Mandatory spending is primarily spending on Social Security, Medicare, and Medicaid. Other mandatory spending
programs include Temporary Assistance to Needy Families (TANF), Supplemental Security Income (SSI),
unemployment insurance, veterans’ benefits, federal employee retirement and disability, SNAP (formerly Food
Stamps), and refundable tax credits, such as the Earned Income Tax Credit (EITC). See CRS Report RL33074,
Mandatory Spending Since 1962, by D. Andrew Austin and Mindy R. Levit.
9 See CRS Report RL34424, Trends in Discretionary Spending, by D. Andrew Austin and Mindy R. Levit.
10 This figure includes undistributed offsetting receipts of $82 billion.
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Reducing the Budget Deficit: Tax Policy Options

An evaluation of the federal budget deficit and appropriate policy responses requires examining
anticipated longer-term deficits. The FY2010 budget deficit is partially due to fiscal stimulus and
other policies enacted in response to the financial crisis and Great Recession which began in late
2007. Automatic increases in spending during the recession also contributed to budget deficits.
While the budget deficit was 9% to 10% of GDP in FY2010, the CBO baseline has budget
deficits at 3.0% of GDP in 2015. The President’s FY2012 Budget projects deficits of 3.2% of
GDP by 2015. Various projections predict budget deficits to persist through FY2020 and beyond.
The National Debt and Interest Payments
Budget deficits add to the national debt. In 2010, the national debt was $9 trillion.11 By 2016,
projections suggest that the national debt will reach $15 trillion.12 Figure 2 illustrates debt as a
percentage of GDP from 1970 through 2016. Between 1970 and the mid-1990s, debt as a
percentage of GDP increased from less than 30% to nearly 50% of GDP. In the late-1990s, during
a phase of federal budget surpluses and strong economic growth, the debt decreased to less than
33% of GDP in 2001. By 2009, debt relative to GDP had increased to 62%. By 2016, it is
expected that debt relative to GDP will reach 76%.13
Figure 2. Federal Debt as a Percentage of GDP
1970 - 2016
90
Projection
80
70
60
P
D
G
50
of
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ta
n 40
e
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Pe 30
20
10
0
970
972
974
976
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980
982
984
986
988
990
992
994
996
998
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002
004
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2
2
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2
2

Source: CRS graphic using data from the President’s FY2012 Budget, Historical Tables, Table 7.1.

11 This figure is debt held by the public, as reported in the President’s FY2012 Budget, Historical Tables, Table 7.1.
Available at http://www.whitehouse.gov/omb/budget/Historicals.
12 Ibid.
13 For additional background, see CRS Report RL30520, The National Debt: Who Bears Its Burden? by Marc Labonte.
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Notes: Debt depicted is debt held by the public (e.g., debt held by federal government accounts is excluded).
Data from 2011 through 2016 are projections. Projections assume that the President’s budget is enacted.
Increasing debt can mean increased interest payments to service the debt. Figure 3 illustrates net
interest payments as a percentage of GDP from 1970 through 2016.14 Net interest payments as a
percentage of GDP more than doubled between 1970 and the mid-1980s. After reaching 3.3% in
the early 1990s, net interest payments as a percentage of GDP fell to 1.3% (1970 levels) by 2009.
Net interest payments are predicted to increase to nearly 3% of GDP by 2015.
While increasing national debt is generally associated with rising interest payments, interest rates
are also a determining factor. Rising net interest payments in the early 1980s were largely driven
by increasing interest rates. When interest rates fell towards the end of the 1980s, net interest
payments remained around 3% of GDP as the national debt was increasing. In recent years, net
interest payments have remained low, relative to historical levels, despite rising debt levels. Low
interest rates in recent years have prevented interest payments as a percentage of GDP from
increasing to date. If interest rates rise in the future, all else equal, then interest payments relative
to GDP are projected to increase as well.15 If the national debt increases, as projected, and interest
rates increase, then interest payments as a percent of GDP will rise at a faster rate.
Figure 3. Net Interest as a Percentage of GDP
1970 - 2016
3.5
Projection
3.0
2.5
P
D
G 2.0
of
ge
ta
n
e 1.5
rc
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1.0
0.5
0.0
970
972
974
976
978
980
982
984
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Source: CRS graphic using data from the President’s FY2012 Budget, Historical Tables, Table 8.4.
Notes: Net interest excludes interest paid to federal government holdings of debt.

14 Net interest payments are interest payments that involve a transfer of funds out of the government. Interest payments
made to other government accounts, such as those made to the Social Security trust fund, are excluded.
15 For additional background and analysis, see CRS Report RS22354, Interest Payments on the Federal Debt: A
Primer, by Thomas L. Hungerford.
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Macroeconomic Considerations16
The current fiscal situation is unlikely to be sustainable. Deficit levels are considered
unsustainable when deficits cause the national debt to grow faster than GDP (output) over a
sustained period of time. As the national debt grows faster than output, an increasing share of
national income must be devoted to servicing the debt (making interest payments). With an
increasing share of government spending going toward debt service, investors holding the debt
may begin to lose faith in the government’s ability to continue making interest payments. When
investors lose confidence in the government’s ability to service debt, and become unwilling to
hold the debt at normal interest rates, the government is left with two options. First, the
government can default on its debt and fail to pay investors. Second, the government can
monetize the debt, or finance debt repayment through money creation. The second option will
result in rapid price inflation that will reduce the real value of the debt held by investors.
The continued ability of the Treasury to issue debt at historically low interest rates suggests that
investors do not view the current U.S. fiscal circumstance as irreversible. Increasing federal
deficits in 2009 and 2010 are largely attributable to the economic recession and subsequent policy
responses. The policy response includes actions taken in response to the financial crisis, including
fiscal stimulus and the Troubled Asset Relief Program (TARP).17 Fiscal policy responses have
included increased spending and tax reductions, enacted to stimulate a weak economy. If,
however, the deficit does not return to sustainable levels, and the debt continues to grow after the
economy has recovered, the risk that the deficit and accompanying debt will stunt economic
growth and potentially decrease standards of living increases.
Federal Revenues
In FY2010, federal revenues were $2.2 trillion. The sources for these revenues are illustrated in
Figure 4. Nearly 41.5% of total receipts ($899 billion) was collected through individual income
taxes. Another 40.0% ($865 billion) was collected through social insurance and retirement (i.e.,
payroll) taxes. The corporate tax accounted for 8.9% ($191 billion) in total tax collections.18
Excise taxes accounted for 3.1% of total collections ($67 billion). The estate and gift taxes were
responsible for 0.8% ($18 billion) in revenue, and the remaining 5.6% ($122 billion) in receipts
came from other sources.19

16 For additional background and analysis, see CRS Report R40770, Economic Effects of a Budget Deficit Exceeding $1
Trillion, by Marc Labonte.
17 For background on TARP, see CRS Report R41427, Troubled Asset Relief Program (TARP): Implementation and
Status, by Baird Webel.
18 In 2007, prior to the financial crisis, corporate tax revenues were 14.4% of total receipts, or $370 billion.
19 Other receipts include customs duties and fees as well as miscellaneous receipts.
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Figure 4. Federal Receipts by Source
FY2010

Source: CRS graphic using data from the President’s FY2012 Budget, Historical Tables, Table 2.1 and Table 2.5.
Figure 5 illustrates the trends in federal receipts as a percentage of GDP, by receipts source, over
the past four decades. As can be seen in Figure 5, both individual and corporate tax receipts
relative to GDP reached a 40-year low in 2009. Corporate receipts recovered modestly in 2010.
The low levels of individual and corporate income tax collections can be partially explained by
the recession. Another factor contributing to reduced income tax collections is the increased
availability of income tax credits, exemptions, and deductions. Individual income tax collections
have tended to be below historical averages, since the 2001 tax cuts. Social insurance tax
collections were slightly above the historical average.
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Figure 5. Federal Revenue as a Percentage of GDP
1970 - 2010

Source: CRS graphic using data from the President’s FY2012 Budget, Historical Tables, Table 2.1, Table 2.5, and
Table 10.1.
As a benchmark, it is helpful to consider the magnitude of the increase in revenues that would be
needed, should deficits be eliminated through only tax increases.20 Table 1 provides some
guidance on the percentage increase in revenues that would be necessary to achieve a balanced
budget under the CBO current policy baseline and the Administration’s FY2012 budget proposal
(OMB), based on FY2011 and FY2015 projections.21
Both CBO and OMB projections suggest that the federal budget deficit will remain around $1.5
trillion in FY2011. Closing this budget deficit using only increased income tax revenue would
require income tax receipts to increase by 145%, using CBO’s projections, or 141%, using
OMB’s projections. Increases in income tax receipts could be achieved through higher rates or by
reducing various tax expenditures (this issue is discussed further below). Balancing the FY2011
budget through increases in both income and social insurance taxes would require an increase in
receipts of 78%, using CBO’s projections, or 72%, using OMB’s projections. Increasing social
insurance receipts could be achieved either through rate increases or by applying the tax to
income above the social security cap.22

20 For a comparison of the magnitude of various spending decreases and tax increases necessary to balance the budget,
see CRS Report RS21939, The Magnitude of Changes That Would Be Required to Balance the FY2011 Budget, by
Marc Labonte.
21 For a full comparison of the different budget estimates and projections, see CRS Report R41147, FY2011 Budget
Proposals and Projections, by D. Andrew Austin.
22 In 2011, only the first $106,800 in income is subject to the Social Security payroll tax. For additional background,
(continued...)
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Table 1. Achieving a Balanced Budget Through Tax Increases

2011
2015
President’s
President’s
CBO
Baseline
Budget (OMB)
CBO Baseline
Budget (OMB)
Increase Individual
Income Taxes Only
145% 141% 30% 37%
Increase Income and
Social Insurance Taxes
78% 72% 18% 21%
Increase Al Taxes
65%
59%
15%
17%
Source: CRS calculations based on data from CBO’s Budget and Economic Outlook: Fiscal Years 2011 through
2021, January 2011, and the President’s FY2012 Budget (OMB).
Balancing the budget through tax increases in FY2015 would require less in terms of increased
revenues. Both CBO and OMB project increasing tax revenues and falling deficits over time as
the economy continues to recover from the recent recession.23 Note that CBO’s baseline is current
law, meaning that the 2001 and 2003 tax cuts, and the AMT patch, among other policies, are
allowed to expire as scheduled in 2012. If tax cuts that are scheduled to expire are extended
further, the tax increases required to eliminate the deficit would be even larger.
Using these projections, increasing income tax revenues by 30% (using CBO’s baseline) or 37%
(using OMB’s projections) would achieve a balanced budget in FY2015. If both income and
social insurance taxes were increased, revenue increases of 18% (using CBO’s baseline) or 21%
(using OMB’s projections) would be necessary to achieve a balanced budget. If all taxes were
increased, including corporate taxes, estate and gift taxes, and excise taxes, revenues would have
to increase by 15% (using CBO’s baseline) or 17% (using the OMB’s projections) to achieve a
balanced budget.
An Economic Framework for Evaluating Tax Reform
Options
Economists oftentimes evaluate the relative merits of tax policies using the concepts of economic
efficiency and equity. Generally, there is a trade-off between economic efficiency and equity.24
Tax systems that maximize economic efficiency oftentimes do not have desirable distributional
consequences. Thus, policymakers may strive to balance these two objectives when implementing
changes to the tax code.

(...continued)
see CRS Report RL33943, Increasing the Social Security Payroll Tax Base: Options and Effects on Tax Burdens, by
Thomas L. Hungerford.
23 For FY2011, CBO projects a deficit of $1,480 billion with total revenues of $2,228 billion. OMB’s FY2011
projections predict a deficit of $1,645 billion with total revenues of $2,174 billion. For FY2015, CBO projects a deficit
of $551 billion with total revenues of $3,651 billion. OMB’s FY2015 projection predicts a deficit of $607 billion with
total revenue of $3,487 billion.
24 Economic efficiency means that society’s resources are being used in a way that maximizes the production of goods
and services, or economic output. Equity is concerned with how fairly society’s resources are distributed.
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Another challenge for policymakers is that tax reforms may create winners and losers.
Eliminating targeted tax incentives may increase tax liability for some, even as rates across the
board are reduced. While eliminating certain tax incentives targeted for low-income individuals
may broaden the tax base, eliminating such tax preferences may raise equity concerns.
Alternatively, eliminating tax preferences that tend to benefit higher-income taxpayers may
enhance tax-code equity at the expense of economic efficiency, if the tax preferences were
designed to address a market failure.25 For example, higher-income households are more able and
more likely to benefit from education-related tax incentives.26 Thus, eliminating various
education tax benefits could enhance tax code equity. Eliminating education tax incentives,
however, could reduce economic efficiency. Tax subsidies for education can enhance economic
efficiency if they are successful in increasing investment in education.
Economic Efficiency and Tax Reform
Generally, in the absence of market failures, economists believe that market outcomes maximize
economic efficiency.27 Taxes may lead to inefficiencies when they result in changes in behavior.
These behavioral responses, generally, occur when taxes change the price of goods or activities.
For example, if an individual responds to an increase in income taxes by working less, the tax is
said to generate an inefficiency. Not all taxes, however, are associated with market inefficiencies.
For example, taxes on the production and consumption of goods associated with negative
externalities can enhance economic efficiency.28 Take, for example, the federal excise tax on
gasoline. The consumption of gasoline in motor vehicles may generate negative externalities, in
the form of pollution and roadway congestion. Since consumers fail to take these negative
external costs into account when making consumption decisions, markets may lead to
overconsumption of gasoline relative to economically efficient levels. The federal excise tax on
gasoline reduces consumption of gasoline, leading the market to more efficient levels of gasoline
consumption.
Taxes generally lead to greater inefficiencies when market participants are highly responsive to
tax-imposed changes in price.29 If market participants are responsive to price changes, this means
they change their behavior in response to taxes, driving the level of economic activity away from
the socially optimal level. In other words, market participants increase participation in low-tax
activities while engaging in fewer high-tax activities. This logic is consistent with the economic
theory of optimal commodity taxation, which suggests that taxes are more efficient when levied
on goods with low demand elasticities (i.e., demand is not responsive to changes in price).30
While taxing goods with low demand elasticities may be economically efficient tax policy, such a
policy may raise equity concerns. Demand elasticities—or the responsiveness of demand for a

25 Problems that cause market economies to fail to deliver goods and services efficiently are referred to as market
failures.
26 For a more detailed discussion, see CRS Report RL32554, An Overview of Tax Benefits for Higher Education
Expenses, by Mark P. Keightley.
27 Markets may fail to maximize economic efficiency in the presence of externalities, in the case of public goods, or if
there are informational asymmetries.
28 An externality is a spillover from a transaction to a third party, one not directly involved in the transaction itself.
Negative externalities result from transactions that impose a cost on the third party not paid by those directly involved
in the transaction.
29 The inefficiency of a tax increases as the elasticity of demand or supply for the good increases.
30 This principle is known as the Ramsey Rule.
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product to changes in price—for necessities, such as basic food, clothing, healthcare, and shelter,
tend to be relatively low. Conversely, luxury goods tend to have relatively elastic demand. Thus, a
tax system designed to minimize economic distortions and maximize economic efficiency would
tend to tax necessities, even though necessities represent a larger share of household consumption
among those with low income. However, placing higher tax rates on necessities relative to luxury
goods may violate equity principles, which are discussed below.
Economic theory informs that the inefficiency of a tax is an increasing function of the tax rate. In
other words, the inefficiency of a tax is not a linear function of tax rates. Instead, the economic
inefficiency associated with higher tax rates is disproportionately large. Thus, to minimize
distortions and economic inefficiencies from taxation, taxes should be levied at low rates.
Broadening the tax base, while lowering tax rates, can yield the same amount of revenue with
fewer inefficiencies. Broadening the tax base, to allow for reduced rates, was one of the major
policy objectives of the last major overhaul of the U.S. tax code in 1986.
Equity and Tax Reform
Fairness in the tax code can be evaluated using the concept of equity. There are two different
measures of equity: horizontal equity and vertical equity. The tax system may be used as a tool
for redistribution, which some may view as enhancing equity in society. How much the tax
system should be used for redistribution is a policy choice, and beyond the scope of this report.
The principle of vertical equity suggests that groups with more resources, or a greater ability to
pay, should pay more in taxes. Progressive tax structures, such as the current federal income tax
system, are vertically equitable, as those with higher incomes pay higher rates. Consumption
taxes, which tend to be regressive, are not vertically equitable.
The principle of horizontal equity suggests that individuals who are similar should be treated
similarly by the tax code. As an example, consider many homeowners are given tax incentives for
housing, while renters are not. Two families, with similar incomes living in similar houses, may
have different income tax liabilities if one family owns their house while the other rents. Thus,
tax preferences designed to encourage certain behavior may create circumstances where similar
individuals have different tax liabilities. This may be viewed as violating the principle of
horizontal equity.
Options for Tax Reform31
The following sections provide a broad overview of various tax reform options, categorized
according to the various sources of federal revenues discussed above.32 Providing a detailed
analysis of the many reform options available is beyond the scope of this report. Instead, broad

31 The Congressional Budget Office (CBO) periodically provides a report to the House and Senate Committees on the
Budget presenting options for altering federal spending and revenues. The CBO Budget Options, Volume 2, published
in August 2009, contains 66 revenue options (not all revenue options, however, generate additional revenues). Details
on these various revenue options can be found at http://www.cbo.gov/ftpdocs/102xx/doc10294/08-06-
BudgetOptions.pdf.
32 For a general overview of deficit reduction policy options, see CRS Report R41778, Reducing the Budget Deficit:
Policy Issues, by Marc Labonte.
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options for reform within each revenue source are reviewed. This overview provides a foundation
for the discussion of specific deficit reduction proposals that follows.
Individual Income Tax Reform
There are two broad options for generating additional revenues using the individual income tax.
First, tax revenues can be enhanced by increasing tax rates. 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). Eliminating enough exemptions, deductions, and
credits may allow policymakers to reduce tax rates and increase revenues generated through the
income tax system simultaneously. Since marginal tax rates generally influence economic
behavior, eliminating targeted preferences, allowing for reduced tax rates, could enhance
economic efficiency. Further, if existing tax preferences tend to benefit higher income taxpayers,
eliminating such preferences may enhance equity within the tax code.
Table 2 lists the largest individual income tax expenditures, ranked according to federal revenue
losses. Taken together, these 10 items account for $651 billion in foregone revenue annually, or
approximately 70% of total individual tax expenditures.33 As noted above (Figure 4), FY2010
individual income tax collections were $898.5 billion. Given that tax expenditures have grown to
nearly $1 trillion annually, eliminating or scaling back existing tax expenditure provisions could
be a part of any deficit reduction proposal.34
Table 2. Largest Individual Income Tax Expenditures: 2010
billions of dollars
Tax Expenditure
Amount
Exclusion of employer provided healthcare
105.7
Mortgage interest deduction
90.8
Exclusion of contributions and earnings to retirement plans
83.8
Reduced tax rates on dividends and long-term capital gains
77.7
Making Work Pay credit
59.7
Earned Income Tax credit
56.2
Child tax credit
55.1
Exclusion for Medicare benefits
54.6
Deduction for charitable contributions
36.8
Deduction of state and local taxes
30.7
Source: Joint Committee on Taxation, JCS-3-10 and 2010 CRS Tax Expenditure Compendium.
Notes: Tax expenditure items as compiled by CRS may include multiple items as listed by JCT. See the 2010
CRS Tax Expenditure Compendium for details.

33 U.S. Congress, Senate Committee on the Budget, Tax Expenditures: Compendium of Background Material on
Individual Provisions, committee print, prepared by Congressional Research Service, 111th Cong., 2nd sess., December
2010, S. Prt. 111-58 [Henceforth referenced as “2010 CRS Tax Expenditure Compendium”].
34 For more information on tax expenditures and the federal budget, see CRS Report RL34622, Tax Expenditures and
the Federal Budget, by Thomas L. Hungerford.
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A closer look at the specific provisions listed in Table 2 highlights the various types of tax
expenditure provisions as well as possible equity issues associated with using tax expenditures to
deliver federal assistance. The first, third, and eighth provisions listed are exclusions from
income. Under current law, employer provided healthcare, contributions to retirement accounts,
and Medicare benefits are not included in taxable income.35 Excluding contributions to retirement
accounts and employer provided healthcare from income reduces the cost of this form of
compensation, encouraging employers to provide these benefits to employees. Delivering such
benefits through the tax code, however, may raise equity concerns. Both the retirement
contribution and healthcare exclusions are examples of “upside-down” subsidies, where higher
income taxpayers receive a greater benefit.36 Generally, as a consequence of the progressive
income tax structure, exclusions and deductions result in an upside-down subsidy.
The mortgage interest deduction and reduced rates for dividends and long-term capital gains also
raise equity concerns. The mortgage interest deduction is another example of an upside-down
subsidy.37 Eliminating the mortgage interest deduction would reduce after-tax income by an
estimated 0.01% for individuals in the lowest income quintile.38 For individuals in the 90 to 95th
income percentile, eliminating the deduction would reduce after tax income by an estimated
1.7%. Proponents of the mortgage interest deduction, however, cite benefits associated with
homeownership as a possible rationale for retaining this tax preference.39 The reduced rates for
dividends and long-term capital gains tend to disproportionally benefit higher-income
households, as such households derive a larger proportion of income from these sources.40 One
possible justification for reduced tax rates on dividends and long-term capital gains may be a
reduction in double taxation of corporate income.41 With respect to capital gains rates, the
revenue raising potential of a tax increase is less than the tax expenditure, due to behavioral
responses.42
In contrast, the earned income tax credit (EITC) and the child tax credit both provide greater
benefit to lower-income taxpayers.43 Both credits are at least partially refundable, allowing
benefits to flow to those with limited tax liability. Eliminating these tax benefits would raise
additional revenue, but decrease the progressivity of the current individual income tax system.

35 The U.S. income tax treats all forms of employee compensation as taxable income, unless the tax code provides a
specific exclusion. Thus, exclusions for retirement contributions and healthcare are considered tax expenditures.
36 For more on the policy option of eliminating or reducing the exclusion for employer provided healthcare, see CRS
Report R40648, Tax Options for Financing Health Care Reform, by Jane G. Gravelle.
37 See CRS Report R41596, Select Tax Benefits for Homeowners: Analysis and Options, by Mark P. Keightley.
38 For more background on the estimated effects of eliminating the mortgage interest deduction, and analysis of other
mortgage interest deduction policy options, see Eric Toder, Margery Austin Turner, and Katherine Lim, et al.,
Reforming the Mortgage Interest Deduction, Urban Institute and Tax Policy Center, April 2010,
http://www.taxpolicycenter.org/uploadedpdf/412099-mortgage-deduction-reform.pdf.
39 See CRS Report R41596, Select Tax Benefits for Homeowners: Analysis and Options, by Mark P. Keightley.
40 For additional background, see CRS Report R41394, Tax Treatment of Long-Term Capital Gains and Dividends and
Related Provisions in the President’s FY2011 Budget Proposal, by Mark P. Keightley.
41 For additional background, see CRS Report RL33171, Federal Business Taxation: The Current System, Its Effects,
and Options for Reform, by Donald J. Marples.
42 For further discussion, see CRS Report R41364, Capital Gains Tax Options: Behavioral Responses and Revenues,
by Jane G. Gravelle.
43 For additional background, see CRS Report RL31768, The Earned Income Tax Credit (EITC): An Overview, by
Christine Scott and CRS Report RL34715, The Child Tax Credit, by Maxim Shvedov.
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A full analysis of tax expenditures in the current tax code is beyond the scope of this report.44 The
examples above serve to highlight the complexities associated with a deficit reduction plan that
looks to reduced tax expenditures as a source of additional revenues. Many of the tax code’s
current tax expenditure provisions were adopted to encourage targeted behavior and enhance
economic efficiency by addressing externalities or to promote equity and fairness in the tax code.
Eliminating or scaling back various tax expenditure provisions will require analysis of the
revenue gains that can be achieved through various reforms, as well as the distributional and
economic consequences of various tax expenditure reforms.
Social Insurance Tax Reform
Mandatory spending associated with entitlement programs such as Social Security, Medicare, and
Medicaid has grown in recent decades. In the early 1960s, mandatory spending accounted for
approximately 30% of all federal spending. By 2010, mandatory spending had grown to account
for approximately 55% of all federal spending.45 Social Security, Medicare, and Medicaid
accounted for nearly 63% of total mandatory spending in 2009.46 The number of Social Security
and Medicare recipients is expected to increase in coming years with the aging of the baby boom
generation. As the population ages, and if healthcare costs continue to rise, financial pressures on
these entitlement programs will continue to contribute to long-run fiscal challenges.
Social Security and some Medicare spending is managed through federal trust funds.47 Revenues
are collected through payroll taxes and deposited into these trust funds. Benefits are also paid out
from these trust funds. While both trust funds have historically run surpluses, it is expected that
the Social Security and Medicare trust funds will be exhausted within the next 30 years. Restoring
these trust funds essentially involves choosing between two alternatives: reduce outlays (benefits)
or increase revenues (taxes). As this report focuses on tax policy options for increasing revenues,
policy options to reduce outlays through eligibility and benefit modifications are not discussed.
One way to potentially increase revenues for entitlement program trust funds is through tax rate
increases. Generally, the Social Security payroll tax is 12.4% (6.2% is collected from the
employer and employee each).48 For 2011, the employee’s share of the payroll tax has been
reduced by two percentage points, to 4.2%.49 Payroll taxes are also used to fund Medicare’s
Hospital Insurance (HI) trust fund.50 The Medicare payroll tax is generally 2.9%, with employers
and employee each contributing 1.45%. Under the Patient Protection and Affordable Care Act
(PPACA; P.L. 111-148), an additional payroll tax of 0.9% on high-income taxpayers (income

44 2010 CRS Tax Expenditure Compendium.
45 For additional background, see CRS Report RL33074, Mandatory Spending Since 1962, by D. Andrew Austin and
Mindy R. Levit.
46 Ibid., p. 8.
47 For additional background, see CRS Report R41328, Federal Trust Funds and the Budget, by Thomas L. Hungerford
and CRS Report R41436, Medicare Financing, by Patricia A. Davis. Medicare Part B is financed mostly through
general revenues. Medicare Part D is also partially financed through general revenues.
48 For additional background, see CRS Report RL33028, Social Security: The Trust Fund, by Dawn Nuschler and Gary
Sidor.
49 The Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 (P.L. 111-312). The law states that
this temporary tax reduction will not affect the balances in the Social Security trust fund, as lost revenues are to be
transferred from the general fund. Nonetheless, this provision contributes to budget deficits.
50 For additional background, see CRS Report R41436, Medicare Financing, by Patricia A. Davis.
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above $200,000 for single filers and $250,000 for married filers) is scheduled to take effect in
2013.51
Another option for increasing Social Security trust fund revenues is to increase the cap on taxable
earnings.52 In 2011, only the first $106,800 in income is subject to Social Security payroll taxes
(all income is subject to Medicare payroll taxes). One option is to increase the share of earnings
subject to the Social Security payroll tax.53 In 1982, approximately 90% of covered earnings were
subject to the payroll tax.54 By the late 2000s, the proportion of covered earnings subject to the
payroll tax was closer to 83%. CBO estimates that increasing the share of covered earnings
subject to Social Security payroll taxes to 90% would generate approximately $503 billion over
10 years.55 Increasing the share of covered earnings to 92% would generate approximately $669
billion over 10 years.56 Increasing the share of covered earnings to 90% or 92% is unlikely to
generate enough additional revenues to achieve Social Security solvency in the long run.57
Corporate Tax Reform
Congress has begun evaluating various options for corporate tax reform.58 As with individual tax
reform, much of the discussion has centered on broadening the base by eliminating various
deductions, exemptions, and credits, and reducing statutory rates.59 Deficit reduction may or may
not be a policy objective of corporate tax reform. In his 2011 State of the Union address,
President Obama called for corporate tax reform that does not add to the deficit.60
Corporate tax reform proposals may also address U.S. taxation of income earned abroad. The
current U.S. tax system is a hybrid of a residence-based and territorial tax system.61 Reforms that
move toward a territorial tax system, where income is taxed where it is earned, may enhance
economic efficiency. A switch to a territorial tax system, however, would likely result in federal

51 The additional revenues will be transferred to the Medicare Hospital Insurance Trust Fund (Part A). See CRS Report
R41128, Health-Related Revenue Provisions in the Patient Protection and Affordable Care Act (PPACA), by Janemarie
Mulvey.
52 An additional revenue option, not addressed here, would be to include state and local government employees that do
not currently participate in the federal Social Security program.
53 For additional analysis of this policy option, see CRS Report RL33943, Increasing the Social Security Payroll Tax
Base: Options and Effects on Tax Burdens, by Thomas L. Hungerford.
54 Covered earnings are earnings from employment covered by the Social Security and Medicare programs.
55 Congressional Budget Office, Budget Options: Volume 2, Washington, DC, August 2009, pp. 234-235,
http://www.cbo.gov/ftpdocs/102xx/doc10294/08-06-BudgetOptions.pdf.
56 Ibid.
57 A 2005 report found that increasing the share of covered earnings to 90% would eliminate 43% of the long-run
shortfall in Social Security. See CRS Report RL33840, Options to Address Social Security Solvency and Their Impact
on Beneficiaries: Results from the Dynasim Microsimulation Model, by Dawn Nuschler et al. Since 2005, conditions in
the Social Security trust fund have deteriorated further.
58 The House Ways & Means Committee has had the first in a series of hearings on tax reform. Much of the focus on
the first hearing was on corporate reforms. See U.S. Congress, House Committee on Ways and Means, First in a Series
of Hearings on Fundamental Tax Reform , 112th Cong., 2nd sess., January 20, 2011.
59 For a detailed analysis of corporate tax reform issues, see CRS Report RL34229, Corporate Tax Reform: Issues for
Congress, by Jane G. Gravelle and Thomas L. Hungerford.
60 The White House, The State of the Union, 2010, speech available at http://www.whitehouse.gov/state-of-the-union-
2011.
61 See CRS Report RL34115, Reform of U.S. International Taxation: Alternatives, by Jane G. Gravelle.
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revenue losses. Overall, corporate tax reform could be structured to be revenue neutral, or
structured to raise additional revenues to reduce deficits. As was illustrated in Figure 5, revenues
collected from the corporate tax relative to GDP are currently low relative to historical standards.
Table 3 lists the 10 largest corporate tax expenditures for 2010. These 10 corporate tax
expenditures together resulted in roughly $96.6 billion in revenue losses during 2010, and
account for about 80% of total tax expenditure dollars directed to corporations. For comparison,
FY2010 corporate tax collections were $191.4 billion (see Figure 4). Scaling back corporate tax
expenditures is one option for generating additional revenues through the corporate tax system.
Table 3. Largest Corporate Income Tax Expenditures: 2010
billions of dollars
Tax Expenditure
Amount
Depreciation of equipment in excess of the alternative depreciation
24.1
system
Inclusion of income arising from business indebtedness discharged by the
21.1a
reacquisition of a bad debt instrument
Deferral of active income of controlled foreign corporations
12.5
Exclusion of interest on public purpose state and local government
7.5
bonds
Inventory property sales source rule
7.2
Production activity deduction
7.0
Credit for low-income housing
4.9
Expensing of research and experimentation expenditures
4.3
Inventory methods and valuation
4.0
Credit for increasing research activities
4.0
Source: Joint Committee on Taxation, JCS-3-10 and 2010 CRS Tax Expenditure Compendium.
Notes: Tax expenditure items as compiled by CRS may include multiple items as listed by JCT. See the 2010
CRS Tax Expenditure Compendium for details.
a. This provision was enacted temporarily to assist financially troubled companies during the financial crisis.
The largest corporate tax expenditure is the allowance of accelerated depreciation. Accelerated
depreciation allows firms to recover capital costs over a shorter period of time through larger
depreciation deductions. By allowing firms to recover costs quickly, the tax code subsidizes
capital investment. Depreciation allowances have been enhanced in recent years due to policies
enacted during the economic recession designed to stimulate investment.62 The Tax Relief,
Unemployment Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) expanded and
extended temporary bonus depreciation provisions, with an estimated revenue loss of $55 billion
in 2011. The cost of the temporary extension is $20.1 billion over the 2011 to 2020 budget
window, as some of the bonus depreciation costs are diminished through reduced depreciation
deductions over time in the out years.

62 For more information, see CRS Report RL31134, Using Business Tax Cuts to Stimulate the Economy, by Jane G.
Gravelle and CRS Report R41034, Business Investment and Employment Tax Incentives to Stimulate the Economy, by
Thomas L. Hungerford and Jane G. Gravelle.
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The second-largest corporate tax expenditure in 2010 was the result of a provision added to the
tax code under the Recovery Act (ARRA; P.L. 111-5).63 Generally, discharges of indebtedness are
included in taxable income. Under this provision, taxpayers can defer taxable cancellations of
indebtedness income that occurred in 2009 or 2010. This temporary provision was enacted to
assist financially troubled companies following the financial crises.
The third-largest corporate tax expenditure relates to the U.S. treatment of income earned abroad.
Deferral of active income of U.S. subsidiaries operating abroad allows firms to delay the payment
of U.S. taxes by not repatriating income. In addition to generating revenue losses, deferral
provides an incentive for U.S. firms to invest in active business operations in low-tax foreign
countries. One possible benefit to deferral is that it may help make U.S. firms more competitive
when operating abroad.
Allowing state and local governments to issue tax-exempt bonds is the fourth-largest corporate
tax expenditure.64 Corporate purchasers, and other purchasers, of tax-exempt debt are not required
to pay taxes on interest earned from holding such bonds, thereby reducing their federal income
tax liability.65 This allows issuers to borrow at reduced interest costs. In recent years, Congress
has allowed for various other forms of federally-subsidized debt (e.g., tax-credit bonds).66 Tax-
exempt bonds provide a larger subsidy to high-income holders, and thus have been criticized for
being inequitable. Tax-credit bonds provide a more equitable benefit to bond holders, as their
value is not dependent on a taxpayer’s marginal tax rate. The broader question is to what extent
tax-subsidized debt is being used to provide public goods or address other potential market
failures.
The fifth and ninth tax expenditures listed in Table 3 also relate to the tax treatment of
inventories. Current tax rules governing the source of inventory sales interact with foreign tax
credit provisions in a way that can effectively exempt a portion of a firm’s export income from
U.S. taxation (the fifth item in Table 3). Last-in, first-out (LIFO) inventory accounting methods
result in a tax subsidy when prices are rising, by allowing for a higher measure for cost of goods
sold, which reduces taxable income (the ninth item in Table 3). International Financial Reporting
Standards (IFRS) do not permit LIFO inventory accounting methods. As U.S. accounting
standards merge with IRFS, LIFO inventory accounting methods will no longer be an option.67
The production activity deduction, the sixth-largest corporate tax expenditure in 2010 reduces the
effective tax rate for domestic manufacturers. The provision was adopted in 2004, and is designed
to encourage investment in manufacturing. The domestic production deduction is available for oil
and gas extraction, at a reduced rate. President Obama’s FY2012 budget proposes to eliminate
this deduction for fossil fuels (oil and gas and coal), raising an estimated $18.7 billion over the
2012 through 2021 budget window.68

63 Internal Revenue Code (IRC) § 109(i).
64 On the individual side, the exclusion of interest on public purpose state and local government debt is a $19.3 billion
tax expenditure for 2010.
65 For additional background, see CRS Report RL31457, Private Activity Bonds: An Introduction, by Steven Maguire.
66 For additional background, see CRS Report R40523, Tax Credit Bonds: Overview and Analysis, by Steven Maguire.
67 For additional background, see Janet E. Mosebach and Michael Mosebach, “Does Repealing LIFO Really Matter?”
Tax Notes, May 24, 2010, pp. 901-906.
68 The FY2012 Treasury Green Book, p. 147.
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The remaining corporate tax expenditures are designed to provide support for low-income
housing investments and encourage spending on research and development. The low-income
housing tax credit (LIHTC) was introduced in 1986 to encourage development of affordable
housing.69 The tax code also contains provisions designed to reduce the cost associated with
research and experimentation expenses, such as the ability to expense certain research-related
capital expenditures and tax credits for qualified research-related costs.70 These activities are
viewed by many as generating positive externalities, and thus being underprovided by the market.
These tax subsidies aim to correct these perceived market failures by encouraging additional
investment in low-income housing and research and development.
Switching to a territorial tax system could help address complexities in the corporate tax code
associated with foreign-source. One option would be to allow a “dividend exemption,” allowing
all repatriated dividends to be exempt permanently from U.S. taxation. If deductions allocable to
tax-exempt foreign-source income are also disallowed, such a policy could result in additional
revenues.71
Estate Tax Reform
Historically, estate and gift taxes have represented a small share of federal revenues (on average,
approximately 1.3% of federal revenues were generated through the estate tax over the past 40
years). In 2010, estate and gift taxes generated $18.9 billion in revenues. Taxable estates in 2009
were taxed at a maximum rate of 45%, subject to an exemption of $3.5 million (2009 rates and
exemption levels are most relevant for 2010 revenues).72 Under the Economic Growth and Tax
Relief Reconciliation Act of 2001 (EGTRAA; P.L. 107-16), the estate tax was fully phased-out in
2010. The Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 (P.L. 111-5)
set the maximum rate for the estate tax at 35% with an exemption of $5 million beginning in
2011. The legislation also included a provision allowing a spouse to inherit any unused
exemption. Reducing the exemption amount or increasing the maximum rate is one option for
raising revenue. Relative to other revenue options, the potential for revenue generation is small,
as the base of the estate tax is small relative to the income and payroll tax bases.
Other Tax Options
Consumption Taxes73
Other industrialized nations tend to place a greater reliance than the United States on
consumption taxes to finance government spending (see Table 4). In the United States,
consumption tax collections are equivalent to approximately 4.7% of GDP. Most U.S.

69 For additional information, see CRS Report RS22389, An Introduction to the Design of the Low-Income Housing Tax
Credit, by Mark P. Keightley.
70 For additional background, see CRS Report RL31181, Research and Experimentation Tax Credit: Current Status
and Selected Issues for Congress, by Gary Guenther.
71 See CRS Report RL34115, Reform of U.S. International Taxation: Alternatives, by Jane G. Gravelle, pp. 12-14.
72 For additional background, see CRS Report R40615, Estate and Gift Tax Revenues: Past and Projected in 2009, by
Nonna A. Noto.
73 For a more detailed analysis, see CRS Report R41602, Should the United States Levy a Value-Added Tax for Deficit
Reduction? by James M. Bickley.
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consumption taxes are collected at the state and local level through sales taxes. There is no broad-
based consumption tax at the federal level. Across all OECD countries, consumption taxes
average 10.9% of GDP, including revenues from federal, state, and local governments.
Consumption taxes also tend to constitute a larger portion of overall tax revenues in other
industrialized countries. In the United States, 7.8% of all tax revenues are generated through
consumption taxes. The OECD average is 18.9%.
There are various forms of consumption taxes that could be imposed at the federal level. One
option is a value-added tax (VAT). A value-added tax is a tax, levied at each stage of production,
on each firm’s value added. Another option is a national sales tax. This sales tax could be levied
only on retail sales.74 Consumption taxes are oftentimes regressive, and adoption of a broad-based
consumption tax may raise equity concerns. A third option is a consumed-income tax. The tax
base would be determined by an individual’s consumption (effectively, income less savings). This
option would more easily allow for a progressive tax system.
Table 4. Taxing Consumption: International Comparison
2007
General Consumption
Tax Revenues as a % of
General Consumption
Taxes as a % of Tax
Country
GDP
Taxes as a % of GDP
Revenues (2006)
United States
28.3
4.7
7.8
Japan 28.3
5.1
9.2
Canada 33.3 7.9 14.0
United Kingdom
36.1
10.5
18.1
Germany 36.2 10.6 17.8
France 43.5 10.7 16.9
OECD Average
35.8
10.9
18.9
Source: CRS table based on data from the OECD Tax Database, Tables O.1 and O.5. Available at
http://www.oecd.org/ctp/taxdatabase and OECD, Consumption Tax Trends 2008: VAT/GST and Excise Rates, Trends,
and Administration Issues, OECD Publishing, November 2008.
Notes: Consumption taxes include value-added taxes (VAT), sales taxes, excise taxes, customs and import
duties, and taxes on exports and investment goods. The OECD average is an unweighted average. The United
States does not levy a broad-based consumption tax at the federal level. Consumption tax revenues in the
United States are raised by state and local governments.
The potential for revenue from a consumption tax depends on the size of the taxable base. CRS
estimates suggest that a broad-based value-added tax (VAT) could be levied on a taxable base of
$8.8 trillion.75 Exempting food, healthcare, housing, higher education, and social services from
the taxable base leaves an estimated tax base of $5.1 trillion.76 For low VAT rates, revenues
generated from the VAT can be estimated by multiplying the proposed tax rate by the taxable

74 For a detailed comparison of a VAT and a national sales tax, see CRS Report RL33438, A Value-Added Tax
Contrasted With a National Sales Tax, by James M. Bickley.
75 CRS Report RS22720, Taxable Base of the Value-Added Tax, by James M. Bickley.
76 Ibid.
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base.77 Higher VAT rates may lead to behavioral changes, as individuals reduce consumption or
engage in tax evasion, further complicating VAT revenue estimates.
Carbon Tax
Market-based mechanisms to discourage greenhouse gas emissions (GHG) also represent a
possible federal revenue source.78 As an example, the Congressional Budget Office (CBO)
provides revenue estimates associated with pricing carbon to reduce emissions by 25% of
projected levels in 2022, increasing to a 36% reduction from projected levels by 2026. Such a
plan could raise an estimated $100 billion annually, beginning in 2014.79
The Debt Reduction Task Force proposal, discussed in detail below, considered but ultimately did
not recommend a tax on carbon dioxide (CO2) emissions. A tax of $23 per ton of CO2 emissions
starting in 2018, increasing 5.8% annually, would raise approximately $1.1 trillion in cumulative
revenues through 2025.80 The Debt Reduction Task Force noted that such a tax might be attractive
as it might enhance economic efficiency and promote investment in clean energy. However, a tax
on carbon would also raise energy prices, and would likely be regressive. The revenue raising
capacity of a carbon tax would be diminished to the extent tax collections were used to
compensate low-income persons affected by the carbon tax.81
Motor Fuel Excise Tax
Currently, the United States collects a $0.184 per-gallon federal excise tax on motor fuel.
Generally, this revenue is earmarked for the Highway Trust Fund (HTF).82 The motor fuel excise
tax rate has remained the same since the mid-1990s. Thus, the real value of the tax rate has
eroded over time. In FY2009, the motor fuel excise tax resulted in revenues of $25 billion.83
During the 1990s, the motor fuel excise tax was increased for the purposes of deficit reduction.84
By 1997, however, motor fuel excise tax receipts that were flowing into the general fund were

77 For example, using this method, a VAT of 3% would yield $153 billion in estimated revenues when the VAT is
levied on the smaller base. This estimate, however, does not include potential behavioral responses or potential
administrative costs. For additional discussion, see CRS Report RS22720, Taxable Base of the Value-Added Tax, by
James M. Bickley.
78 For more, see CRS Report R40242, Carbon Tax and Greenhouse Gas Control: Options and Considerations for
Congress, by Jonathan L. Ramseur and Larry Parker.
79 Congressional Budget Office, Budget Options, Volume 2, Washington , DC, August 2009, pp. 254-255,
http://www.cbo.gov/ftpdocs/102xx/doc10294/08-06-BudgetOptions.pdf.
80 Debt Reduction Task Force Plan, p. 43.
81 For a discussion of this issue in the context of a cap-and-trade proposal, see CRS Report R40841, Assisting
Households with the Costs of a Cap-and-Trade Program: Options and Considerations for Congress, by Jonathan L.
Ramseur and Libby Perl.
82 $0.183 per gallon is earmarked for the HTF. The remaining $0.001 per gallon is used to fund the Leaking
Underground Storage Tank (LUST) trust fund. For additional background, see CRS Report R40808, The Role of
Federal Gasoline Excise Taxes in Public Policy, by Robert Pirog.
83 Internal Revenue Service (IRS), Statistics of Income (SOI), Historical Table 20. Available at http://www.irs.gov/
taxstats/article/0,,id=175900,00.html.
84 For background, see CRS Report RL30304, The Federal Excise Tax on Gasoline and the Highway Trust Fund: A
Short History, by Pamela J. Jackson.
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returned to the highway trust fund. In recent years, funds have been transferred from the general
fund to the HTF, as spending from the fund has exceeded fund revenues and reserves.85
Relative to other potential revenue sources discussed above, the revenue potential of the motor
fuel excise tax is small. A $0.01 increase in the motor fuel excise tax would generate an estimated
$1.6 billion to $1.8 billion in annual revenues.86 CBO estimates a $0.25 increase would generate
$305 billion in revenues over 10 years.87 Economists’ estimates of an optimal gas tax, one that
addresses the negative externalities associated with gasoline, suggest that the excise tax on motor
fuel should be closer to $1 per gallon.88 Assuming no additional behavioral responses, increasing
the gas tax to $1 per gallon could raise as much as $1 trillion over 10 years.
Deficit Reduction Proposals
In February 2010, by executive order, President Obama created the National Commission on
Fiscal Responsibility and Reform (Fiscal Commission). The 18-member commission was charged
with “identifying policies to improve the fiscal situation in the medium term and achieve fiscal
sustainability over the long run.”89 The Fiscal Commission released a final report in December
2010.90
A number of other groups have released alternative plans for achieving deficit reduction and
fiscal sustainability.91 A full comparison of the tax policies of these plans is beyond the scope of
this report. 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.”92 The
Debt Reduction Task Force was co-chaired by former Senator Pete Domenici and Alice Rivlin,
former director of the Congressional Budget Office (CBO) and Office of Management and
Budget (OMB).93 The details from this report are included for a number of reasons. First, like the
Fiscal Commission, the Debt Reduction Task Force is a group comprised of a number of budget
experts. Second, the Debt Reduction Task Force’s plan contained specifics that could be

85 For additional background, see CRS Report R41490, Surface Transportation Funding and Finance, by Robert S.
Kirk and William J. Mallett.
86 CRS Report R41490, Surface Transportation Funding and Finance, by Robert S. Kirk and William J. Mallett.
87 Congressional Budget Office, Budget Options: Volume 2, Washington, DC, August 2009, pp. 246-247,
http://www.cbo.gov/ftpdocs/102xx/doc10294/08-06-BudgetOptions.pdf.
88 Ian W. H. Perry and Kenneth Small, “Does Britain or the United States Have the Right Gasoline Tax,” The
American Economic Review, vol. 95, no. 4 (September 2005), pp. 1276-1289.
89 The White House, “Executive Order—National Commission on Fiscal Responsibility and Reform,” press release,
February 18, 2010, http://www.whitehouse.gov/the-press-office/executive-order-national-commission-fiscal-
responsibility-and-reform.
90 The National Fiscal Commission on Fiscal Responsibility and Reform, The Moment of Truth, The White House,
December 2010, http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/
TheMomentofTruth12_1_2010.pdf.
91 For more information on various deficit and debt reduction proposals, see CRS Report R41784, Reducing the Budget
Deficit: The President’s Fiscal Commission and Other Initiatives , by Mindy R. Levit.
92 The Debt Reduction Task Force, Restoring America’s Future: Reviving the Economy, Cutting Spending and Debt,
and Creating a Simple, Pro-Growth Tax System, Bipartisan Policy Center, November 17, 2010,
http://bipartisanpolicy.org/sites/default/files/FINAL%20DRTF%20REPORT%2011.16.10.pdf.
93 Alice Rivlin was also a member of the President’s Fiscal Commission.
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compared to those put forth by the Fiscal Commission. Third, the Urban-Brookings Tax Policy
Center provides distributional analysis of both reports’ tax proposals, allowing for additional
comparison.
Table 5 provides a side-by-side comparison of the Fiscal Commission’s tax proposals, the Debt
Reduction Task Force’s proposals, and tax provisions under current law. There are a number of
similarities between the two proposals. For example, each plan seeks to broaden the tax base by
eliminating various exemptions, deductions, and credits, allowing for lower tax rates. The
following sections highlight similarities, as well as differences, through providing an overview of
the two proposals.
The Fiscal Commission’s Proposal
The Fiscal Commission’s recommendation for deficit reduction and fiscal sustainability included
a comprehensive tax reform proposal. 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. Another stated goal of the proposal is to maintain or increase the progressivity
of the tax code.
The Fiscal Commission’s plan seeks to reduce the deficit by $3.9 trillion through 2020, which is
projected to stabilize the debt at 60% of GDP by 2025. Approximately 25% of this reduction
would be realized through additional revenues, as described in the following paragraphs. The
remainder would come through reductions in spending.
Table 5 provides details on the “Illustrative Plan” proposed by the Fiscal Commission. The
Commission’s income tax proposals focus on eliminating most tax expenditures, allowing for
lower tax rates. The proposal also seeks to reduce the number of income tax brackets from six to
three. The Commission’s proposal would retain, while also simplifying, certain provisions
designed “to promote work, homes, health, charity, and savings.”94 The Fiscal Commission’s
Illustrative Plan keeps the EITC, the child tax credit, the standard deduction, and personal
exemptions. Other existing tax expenditures are also retained, but are modified (e.g., the
mortgage interest deduction, incentives for employer provided healthcare, retirement savings
incentives, and charitable giving incentives).
The Fiscal Commission’s proposal would also generate additional revenues through the payroll
tax, corporate tax, and excise taxes. Additional revenues would be generated through the payroll
tax by increasing the taxable base to include 90% of covered income. A $0.15 increase in the
motor fuel excise tax would also generate additional revenues, eliminating the need to transfer
general revenues to the Highway Trust Fund (HTF).95
The Fiscal Commission’s corporate tax reforms are similar to those proposed on the individual
side. The Commission’s Illustrative Plan suggests eliminating most corporate tax expenditures,
allowing corporate tax rates to be reduced to 28%. One major difference between the Fiscal
Commission’s proposal and that of the Deficit Reduction Task Force is the treatment of foreign-
source income.

94 The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform, p. 30.
95 The Fiscal Commission’s report recommends complementing additional revenues to the Transportation Trust Fund
with budget reforms and spending limits.
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Table 5. Comparing Selected Deficit-Reduction Tax Proposals to Current Law


Current Law
Fiscal Commission Plan
Debt Reduction Task Force Plan
Individual Income Tax




Tax Rates
Rates of 10%, 15%, 25%, 28%, 33%, and 35% Rates of 12%, 22%, and 28%
Rates of 15% and 27%

AMT, PEP, and Pease
AMT subject to annual patches
Eliminate AMT, PEP, and Pease
Eliminate AMT
Maintain current law or an equivalent
Earnings credit of 31.3% for first $20,300 in

EITC
Refundable EITC available. Credit varies based
on number of children and filing status.
alternative
earnings
Maintain current law or an equivalent
$1,600 per-child credit

Child Tax Benefits
Partially refundable child tax credit of $1,000
per child
alternative
Standard deduction of $5,700 for non-
Maintain current law. All individuals take the Eliminate standard deduction and personal
Standard Deduction and

exemption
Exemptions
itemizers. Personal and dependent exemption standard deduction (itemized deductions
of $3,650.
eliminated).
Deductible for itemizers on up to $1 million in 12% non-refundable tax credit on up to
15% refundable tax credit, capped at $25,000

Mortgage Interest
principal. Allowed for second residence, with $500,000 mortgage. No credit for second
an additional $100,000 for home equity.
residence or home equity.
Excluded from income. Beginning in 2018, 40% Cap exclusion at 75th percentile of premium Eliminate employer health exclusion
Employer Provided Health

excise tax on high-cost plans.
Insurance
levels in 2014, with nominal cap frozen
through 2018.

Charitable Giving
Deductible for itemizers
12% non-refundable tax credit
15% refundable tax credit
Various tax-preferred account options. Saver’s Cap tax-preferred contributions to the lower Cap tax-preferred contributions to the lower
credit of up to $1,000.
of $20,000 or 20% of income, consolidate
of $20,000 or 20% of income, expand saver's

Retirement
retirement accounts, and expand the saver's credit
credit

Other Tax Expenditures
Over 150 individual tax expenditures
Eliminate most tax expenditures
Eliminate most tax expenditures
Top rate of 15% for capital gains and dividends Al capital gains and dividends taxed at
$1,000 exclusion for capital gains (or losses).

Capital Gains and Dividends
ordinary rates.
Al other capital gains and dividends taxed at
ordinary rates.

State and Municipal Bonds Interest tax exempt
Interest taxable on newly-issued bonds
Interest tax exempt for public purpose debt
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Current Law
Fiscal Commission Plan
Debt Reduction Task Force Plan
Payroll Tax



Increase payrol tax cap to

Payroll Tax Cap
Payroll tax cap at $106,800
Increase payroll tax cap to
cover 90% of wages
cover 90% of wages
None
One-year payroll tax holiday for employers

Payroll Tax Holiday
Employees given a 2 percentage point
reduction in payroll tax for 2011.
and employees
Corporate Income Tax




Tax Rates
Rate of 35% for most corporations
Rate of 28%
Rate of 27%

International Income
Taxed when repatriated (deferral)
Adopt a territorial tax system
Retains deferral
Passive Foreign-Source
Taxed under Subpart F
Maintain current law
Not explicitly discussed

Income
Corporate Tax Expenditures Over 75 corporate tax expenditures
Eliminate corporate tax expenditures,
Eliminate most corporate tax expenditures
including the domestic production deduction,

last-in first-out (LIFO) account method, and
general business credits.
Excise Tax




Motor Fuel Excise Tax
$0.184 per gal on excise tax on gasoline.
Increase by $0.15 per gal on
No change
Excise Tax on Alcoholic
Distilled spirits taxed at $13.50 per proof
Maintain current law
Adjust excise tax on alcoholic beverages to

Beverages
gallon. Reduced rates for wine and beer.
$0.25 per ounce
Estate Tax



Estate Tax Rate and
35% tax rate with exemption of $5 million
Not explicitly discussed
Extend at 2009 levels (45% rate with $3.5

Exemption
($10 million for couples)
million exemption)
Other Tax Reforms




National Sales Tax
None
None
6.5% debt reduction sales tax
None
None
New tax on sweetened beverages

Sweetened Beverage Tax
Source: CRS, The Fiscal Commission, and the Deficit Reduction Task Force.
Notes: The standard deduction and personal exemption amounts listed are for the 2010 tax year. The payroll tax cap listed is also for 2010. Current tax rates are
scheduled to return to pre-2001 rates at the end of 2012. The estate tax rate and exemption reflect the changes made in P.L. 111-312. Appendix B of the Deficit Reduction
Task Force’s proposal contains a list of tax expenditures that are retained in their plan. PEP stands for the personal exemption phaseout. Pease refers to the limitation on
itemized deduction.
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The Fiscal Commission’s proposal would have the United States tax foreign-source income under
a territorial system.96 With a territorial system, income earned abroad by U.S. multinationals is
taxed where it is earned. The current U.S. tax system taxes U.S. based multinationals’ worldwide
income, allowing foreign tax credits to reduce domestic tax liability for tax payments to foreign
governments. Foreign-chartered subsidiaries of U.S. multinationals can also defer U.S. tax
payments until income is repatriated. To address concerns that passive foreign-source income
could be easily shifted, deferral is restricted for some foreign-source income, which is taxed
under Subpart F. The Fiscal Commission’s proposal would not change the tax treatment of
passive foreign-source income.
The Fiscal Commission’s proposal also suggests reforms that would limit the government’s
ability to raise revenues, while also ensuring that tax reforms are taken should Congress and the
Administration fail to take action. Under the proposal, tax revenues would be limited to 21% of
GDP. Historically, federal receipts have never exceeded 21% of GDP (see Figure 5). Over the 20-
year period 1990 through 2009, total federal receipts as a percentage of GDP averaged 18.1%.97
The Commission’s recommendation also includes what they term a “failsafe,” which would
trigger automatic reductions in tax expenditures, should Congress and the Administration fail to
enact comprehensive tax reform.
Table 6 provides information on the estimated revenues if the provisions in the Fiscal
Commission’s Illustrative Plan were adopted. Over the 2012 through 2020 budget window, it is
estimated these reforms would generate over $1 trillion in additional revenues. Of this, an
estimated $785 billion in revenues would result from comprehensive tax reform. The report does
not distinguish between revenues raised through individual reforms as opposed to corporate
reforms. Revenues are greater in the later years as many of the tax reforms are phased in over
time. Over the 2012 through 2020 time period, the Fiscal Commission’s proposal would reduce
the budget deficits by an estimated $4.1 trillion.98 Thus, approximately 25% of the deficit
reduction can be attributed to revenues generated by the tax provisions noted in Table 6.





96 For additional background on international tax issues, as well as discussion and analysis of possible reforms, see
CRS Report RL34115, Reform of U.S. International Taxation: Alternatives, by Jane G. Gravelle.
97 Calculated using data available in the President’s Fiscal Year 2011 Budget Proposal, Historical Tables, Table 1.2.
98 This figure is based on the Fiscal Commission’s plausible baseline.
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Table 6. Revenues Generated Through Tax Provisions: The Fiscal Commission’s
Illustrative Proposal
billions of dollars

2012 2013 2014 2015 2016 2017 2018 2019 2020 2012-2020
Comprehensive Tax
Reform
0 20 40 80 90 105 120 150 180 785
Raise
Gas
Tax
by
$0.15 0 2 7 12 17 19 19 19 19 114
Raise Taxable Base of
Social Security to
3 5 8 12 14 18 22 26 30 138
Include 90% of Income
Total
3 27 55 104 121 142 161 195 229 1,037
Deficit
Commission’s
-1,004 -819 -722 -798 -889 -913 -931 -1,045
-1,136 -8,257
Plausible Baseline
Source: The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform, Figure
17.
Notes: The plausible baseline does not include extensions of the 2001 and 2003 tax cuts for those with income
above $250,000. The baseline also assumes that the estate tax was extended at 2009 levels and does not include
the temporary 2 percentage point payroll tax deduction.
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. The objectives of the
Debt Reduction Task Force’s proposal were similar to those of the Fiscal Commission: broaden
the tax base and reduce tax rates. Enhancing progressivity in the tax code was another objective.
The Debt Reduction Task Force’s proposal sought to stabilize the federal debt below 60% of
GDP. Of the estimated $5.9 trillion in total debt reduction that would be achieved over the 2012-
2020 period should the proposal be fully implemented, approximately 39% would be achieved
through tax reforms.99
Table 5 above summarizes the key provisions of the Debt Reduction Task Force’s proposed tax
reform. 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. Limited tax benefits would be
retained for children, mortgage interest, charitable giving, and retirement. Unlike the Fiscal
Commission’s proposal, the Debt Reduction Task Force’s plan would eliminate the exclusion for
employer provided health insurance.
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. The estate tax

99 The Debt Reduction Task Force’s payroll tax holiday proposal reduces revenue generated through tax reform. A
larger proportion of the deficit reduction could be attributed to tax reform if the payroll tax holiday is not fully
implemented.
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proposal in the Debt Reduction Task Force’s proposal would also generate additional revenues
relative to current law.100
Both the Fiscal Commission and Debt Reduction Task Force proposals would increase the payroll
tax cap to cover 90% of wages. In addition to increasing the payroll tax cap, the Debt Reduction
Task Force proposed a payroll tax holiday as an economic stimulus measure. The proposal called
for a one-year suspension of the payroll taxes for both individuals and businesses. This proposal
would have resulted in $641 billion in federal revenue losses. The proposal was, in part, effected
by the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 (P.L. 111-312).
P.L. 111-312 enacted a one-year 2 percentage point reduction (from 6.2% to 4.2%) in the payroll
tax rate paid by individuals.
The Debt Reduction Task Force’s proposed corporate tax reform is similar to that of the Fiscal
Commission in that both would reduce corporate tax rates and eliminate most corporate tax
expenditures.101 Unlike the Fiscal Commission, the Debt Reduction Task Force’s plan would not
move toward a territorial tax system.
The Debt Reduction Task Force’s plan proposed two excise tax modifications. First, the plan
would increase excise taxes on alcoholic beverages by $0.25 per ounce. Second, the plan would
impose a new tax on sweetened beverages.102
The Debt Reduction Task Force’s proposal would also introduce a national sales tax. This sales
tax would be levied at 6.5%, and would generate the majority of new revenues raised through tax
reforms in the proposal.
Table 7 presents data on the revenues generated through various tax provisions proposed by the
Debt Reduction Task Force. The proposed reforms to the individual and corporate income taxes
would lead to estimated revenue losses of $415 billion over the 2012-2020 budget window. While
eliminating most tax expenditures results in added revenues ($3.5 trillion over the 2012-2020
window), the increased tax relief for low-income families and families with children, along with
the reduced rates, means that these reforms, overall, are not revenue raisers. In other words, the
Debt Reduction Task Force’s proposed individual and corporate income tax reforms increase the
deficit, on net.

100 Revenues associated with modifying the estate tax are not shown in Table 7. The Debt Reduction Task Force
assumed that the estate tax would be extended at 2009 levels. The estate tax was modified in the Tax Relief,
Unemployment Reauthorization, and Job Creation Act of 2010 (P.L. 111-312).
101 Appendix B of the Debt Reduction Task Force’s plan contains a list of tax expenditures that would be retained.
Corporate tax expenditures that are recommended for retention include accelerated depreciation, deferral of income
from controlled foreign corporations, expensing for small investments, and expensing of research and development
(R&D) expenditures.
102 For analysis of taxes on sweetened beverages, see Kelly D. Brownell, Thomas Farley, and Walter C. Willett, et al.,
“The Public Health and Economic Benefits of Taxing Sugar-Sweetened Beverages,” The New England Journal of
Medicine, vol. 361, no. 16 (October 15, 2009), pp. 1599-1605.
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Table 7. Revenues Generated Through Tax Provisions: The Debt Reduction Task
Force’s Proposal
billions of dollars
2012-

2012 2013 2014 2015 2016 2017 2018 2019 2020 2020
Tax Expenditure Cuts and Reforms
Restructure Itemized
Deductions and Eliminate
230 338 369 397 421 444 428 447 470 3,544
Tax Expenditures
Tax Capital Gains above
$1,000 Exclusion
-1 2 5 29 38 40 42 44 46 243
Restructure Tax Benefits for
Low-Income Families,
Families with Children, and
Eliminate the Standard
-155 -209 -221 -213 -216 -221 -226 -230 -234 -1,914
Deduction and Personal
Exemption
Rate Cuts and New Revenues
Reduce Individual Income
Tax Rates
-70 -109 -123 -136 -149 -161 -173 -183 -194 -1,298
Reduce
Corporate
Tax
Rate -71 -79 -90 -84 -89 -90 -92 -93 -96 -785
Repeal
the
AMT
-23 -31 -34 -36 -38 -40 -42 -45 -48 -338
Re-Index
the
Tax
System
2 6 8 11 13 17 21 24 29 133
Tax
System
Reform
Subtotal -88 -82 -86 -32 -20 -11 -42 -36 -27 -415
Increase the Excise Tax on
Alcoholic Beverages
4 6 6 6 6 6 6 6 7 53
Tax on Sweetened
Beverages
12 17 17 17 18 18 19 19 19 156
Introduce a 6.5% Debt-
Reduction Sales Tax
105 268 326 345 364 382 400 419 439 3,048
Increase the Taxable Base to
90% of Income
1 4 6 9 11 14 17 21 24 107
Total
34 213 269 345 379 409 400 429 462 2,949
Source: The Debt Reduction Task Force Proposal
Notes: The Debt Reduction Task Force’s Proposal also included a one-year sales tax holiday that would have
reduced revenues by $641 billion over the 2012-2020 period. Thus, total revenues generated with the sales tax
holiday included were projected at $2,308 billion.
Nearly all of the revenues raised in the Debt Reduction Task Force’s proposal would be through
the 6.5% national sales tax.103 The 6.5% tax would raise an estimated $3 trillion over the 2012-

103 The national sales tax proposed by the Debt Reduction Task Force would fall on a broad base. Overall, roughly 75%
of personal consumption expenditures would be subject to the tax. Certain goods and services are exempt from the tax,
such as government services, services provided by charitable organizations, educational activities, the imputed value of
financial services, government subsidies to healthcare, and rental housing. Other consumer goods, such as privately
funded healthcare, food, and clothing would be subject to the tax.
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2020 period. As noted in the Debt Reduction Task Force’s report, a sales tax may be attractive
since it does not tax the return to savings and investment, which may promote long-run economic
growth. Sales taxes, broadly, tend to be regressive. Changes in the income tax system noted
above were designed to address this concern. Another potential concern regarding a national sales
tax may be the interaction with existing state-level sales taxes.104
Overall, the Debt Reduction Task Force’s proposal would generate more in terms of additional tax
revenues than would be generated under the Fiscal Commission’s proposal. Over the 2012-2020
period, the Fiscal Commission’s tax reforms would result in roughly $1 trillion in added revenues.
In contrast, the Debt Reduction Task Force’s reforms (not including the payroll tax holiday)
would generate nearly three times as much additional tax revenue. Since the payroll tax holiday
has already been partially enacted, one option would be to take the revenues that would have been
used to finance the holiday and allow for a lower sales tax rate. With the payroll tax holiday
option included, the Deficit Reduction Task Force’s revenue proposals would have generated $2.3
trillion in additional revenues over the 2012-2020 period, or more than twice as much as the
revenue proposals put forth by the Fiscal Commission.
Distributional Impacts
Both the Fiscal Commission’s proposal and the Debt Reduction Task Force’s plan sought to
maintain or enhance progressivity in the tax code. The Tax Policy Center has conducted a
distributional analysis of the two proposals using their microsimulation model.105 Table 8 and
Table 9 summarize the results of their analysis.
The Fiscal Commission’s proposal would make moderate changes to the distribution of the
federal tax burden (see Table 8).106 Average tax rates are estimated to increase for all income
groups. The highest income quintile would see their share of the federal tax burden increase by
approximately one percentage point, from 65.7% to 66.8%. The share of federal taxes paid by
middle-income groups would decrease under the proposal. Increasing the share of taxes paid by
high-income groups, while reducing or maintaining the share paid by lower- and middle-income
groups, may appeal to the notions of vertical equity discussed above.

104 For further discussion, see CRS Report R41602, Should the United States Levy a Value-Added Tax for Deficit
Reduction? by James M. Bickley.
105 Details on the Tax Policy Center’s microsimulation model can be found at http://www.taxpolicycenter.org/numbers/
related.cfm.
106 Additional distributional estimates related to the Fiscal Commission’s proposal, and other deficit reduction
proposals, are available at http://www.taxpolicycenter.org/taxtopics/Deficit-Reduction-Proposals.cfm.
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Table 8. Distributional Impacts of the Fiscal Commission Proposal
2020 law at 2015 income levels
Fiscal Commission
Current Law
Proposal
Share of
Share of
Average
Average
Average
Federal
Average
Federal
Income
Pre-Tax
After-Tax
Federal Tax
Taxes Paid
Federal Tax
Taxes Paid
Group
Income ($)
Income ($)
Rate (%)
(%)
Rate (%)
(%)
1st
Quintile
12,380
11,779
4.9 0.8 5.0 0.8
2nd
Quintile
31,685
28,248
10.8 4.1 12.1 4.2
3rd
Quintile
57,597
47,584 17.4 10.8 18.4 10.4
4th
Quintile
99,859
79,346 20.5 18.5 21.6 17.7
5th
Quintile
317,385
233,979
26.3 65.7 29.3 66.8
Top
1%
2,076,558
1,451,897
30.1 24.9 35.6 26.9
Source: Tax Policy Center. Full analysis available at http://www.taxpolicycenter.org/numbers/displayatab.cfm?
Docid=2855&DocTypeID=2.
Notes: The baseline is current policy, assuming an AMT patch and 2009 estate tax rates. The Fiscal Commission
proposal is the illustrative proposal with individual tax rates of 12%, 22%, and 28%. The distributional impacts
reported are those expected in 2020 evaluated at 2015 income levels.
The Debt Reduction Task Force’s plan appears to increase moderately progressivity in the tax
code (see Table 9). Under the Debt Reduction Task Force’s plan, average federal tax rates
increase for all but the lowest income quintile. Under the plan, the highest income is responsible
for a larger share of federal taxes (66.4% as opposed to 65.5%). Increasing the share of taxes paid
by higher income groups is consistent with vertical equity principles. For all lower-income
groups, the share of the federal tax burden is estimated to fall or remain the same.
The methodology used to generate the distributional analysis of the Debt Reduction Task Force’s
plan may understate the plan’s regressivity. The Tax Policy Center’s analysis allocated the burden
of the consumption tax across individuals by treating the consumption tax as a tax on income
from labor and a tax on profits plus a reallocation of tax burdens based on consumption
patterns.107 This is the so-called “income sources” method for allocating the distribution of
consumption taxes. Another option is to allocate the distribution of the tax burden of a
consumption tax using the ratio of current consumption to current income. This is the so-called
“consumption ratio” method for allocating a consumption tax. A consumption ratio method of
allocation leads to a more regressive distribution of consumption taxes.108 There is disagreement
amongst economists regarding which method best represents the distributional impact of uniform
consumption taxes. Thus, it is possible that the income-sources method used in Table 9 might
overstate tax-system progressivity under the Debt Reduction Task Force’s plan.

107 For additional details, see Eric Toder and Joseph Rosenberg, Effects of Imposing a Value-Added Tax to Replace
Payroll Taxes or Corporate Taxes, Tax Policy Center, Washington , DC, March 18, 2010, http://taxpolicycenter.org/
UploadedPDF/412062_VAT.pdf.
108 For additional background, see Jane G. Gravelle, “The Distributional Case Against a VAT,” in The VAT Reader:
What a Federal Consumption Tax Would Mean for America, ed. Tax Analysts (Tax Analysts, 2011), pp. 102-111.
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Reducing the Budget Deficit: Tax Policy Options

Table 9. Distributional Impacts of the Debt Reduction Task Force’s Plan
2022 law at 2018 income levels
Debt Reduction Task Force
Current Law
Plan
Share of
Share of
Average
Average
Average
Federal
Average
Federal
Income
Pre-Tax
After-Tax
Federal Tax
Taxes Paid
Federal Tax
Taxes Paid
Group
Income ($)
Income ($)
Rate (%)
(%)
Rate (%)
(%)
1st
Quintile
13,751
13,069
5.0 0.8 5.0 0.7
2nd
Quintile
35,042
31,313
10.6 4.0 12.5 4.0
3rd
Quintile
63,944
52,761 17.5 10.8 19.8 10.3
4th
Quintile
112,508
93,727 20.8 18.8 24.2 18.5
5th
Quintile
355,513
261,786
26.4 65.5 31.6 66.4
Top
1%
2,262,666
1,586,676
29.9 24.0 35.8 24.4
Source: Tax Policy Center. Full analysis available at http://www.taxpolicycenter.org/taxtopics/Bipartisan-Policy-
Center-Proposal-Tables.cfm.
Notes: The baseline is current policy, assuming an AMT patch and 2009 estate tax rates. Federal income taxes
include individual and corporate income taxes, payrol taxes, and estate taxes. The proposal also includes a
broad-based sales tax of 6.5%.
Concluding Remarks
Persistent budget deficits and the accompanying increase in national debt is at the forefront of
congressional debate. 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. This report provided a broad overview of some of the potential revenue options
available to Congress.
The majority of federal revenues are collected through the individual income tax system and
through payroll taxes. Revenues can be enhanced by eliminating various deductions, exemptions,
and credits, generally broadening the tax base. A broader tax base could allow for lower tax rates,
which may enhance economic efficiency. There are, however, additional revenue options outside
of the existing tax code.
Both the President’s Fiscal Commission and the Debt Reduction Task Force laid out plans for
achieving fiscal sustainability. Tax reform was a substantial component of both proposals. Each
proposed to modify the existing individual and corporate tax systems by eliminating tax
expenditures allowing for lower tax rates. Each plan also suggested increasing the payroll tax
base by increasing the share of covered wages. The plans differed, however, with respect to how
much revenue would be generated through these tax reforms. Under the Fiscal Commission’s
proposal, comprehensive tax reform and payroll tax changes would generate the majority of
revenues, with additional revenues coming from an additional excise tax on motor fuels. The
Debt Reduction Task Force’s comprehensive tax reform would not generate added revenues
through 2020. Instead, the Debt Reduction Task Force proposed raising revenues through a
consumption tax, in the form of a broad-based national sales tax.
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Reducing the Budget Deficit: Tax Policy Options

Both the Fiscal Commission and Debt Reduction Task Force have provided possible roadmaps for
achieving fiscal sustainability. In both plans, tax reform is an important component.
Understanding that tax reform could play an important role in any successful deficit reduction and
debt control strategy, Congress may want to consider tax policies that will be economically
efficient, equitable, and provide a stable foundation for future economic growth. It is also
important to note, however, that enhancing equity and efficiency in the tax code may not
necessarily lead to deficit reduction.

Author Contact Information

Molly F. Sherlock

Analyst in Economics
msherlock@crs.loc.gov, 7-7797


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