Five Revenue Raisers From the Options Guide and What They Reveal About Tax Reform Trade‑Offs

The useful part

Foundation's new resource, Options for Reforming America's Tax Code 3.0: A Policymaker's Guide to Tax Reform Trade-Offs, models the economic, distributional, and revenue effects of 86 different changes to the tax code. Within the book are 52 options that would decrease federal budget deficits on a dynamic basis over 10 years. As annual deficits approach $2 trillion per year, policymakers in both parties may look to the tax code for revenue.

How it works

• Two tax increases may raise similar amounts of revenue on a conventional basis, but one may harm the nation's economy more.
• Consider two workers with the same $50,000 in total compensation—one earns it all in wages, and the other takes $2,000 of it in tax-free fringe benefits.
• Although the two workers receive the same amount of compensation, the worker with fringe benefits pays less in taxes.
• The top marginal rate increase results in a much larger decrease in gross domestic product (GDP) and a much greater reduction in work.
• Broadening the tax base leads to a more neutral and transparent tax code and can raise similar amounts of revenue to marginal rate increases while doing much less damage to the nation's economy.

What to take from it

Eliminating SALT causes more economic harm because it would increase marginal tax rates on labor income, pass-through business income, and investment in owner-occupied housing. Some may make the tax code more complex or inefficient, while others make the tax code simpler and more neutral. While these benefits are popular with employees and employers, they make the tax code less neutral by favoring some types of compensation over others.

Example or evidence

• A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.
• Compare this option to raising the top marginal individual income tax An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual...
• Though barely 100 years old, individual income taxes are the largest source rate to 50 percent.
• Repeal the Low-Income Housing Tax Credit A tax credit is a provision that reduces a taxpayer's final tax bill, dollar-for-dollar.

Details worth keeping

Common examples include health insurance and retirement plan contributions, though many other so-called "fringe" benefits are also tax-free, including items like the use of on-site gyms, employer payments of student loans, or employee discounts. This option would eliminate the income tax exclusion for fringe benefits, meaning the value of these benefits would be included in an employee's taxable income Taxable income is the amount of income subject to tax, after deductions and exemptions. A narrow tax base is non-neutral and inefficient.

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