We can lower the top tax rate to 23 percent while cutting the deficit by $1.2 trillion. Here’s how.

October 17, 2012

How much can we lower taxes simply by getting rid of tax loopholes and deductions to keep it all revenue-neutral? The Committee for a Responsible Federal Budget argues in a new paper that we can go a lot farther than recent news may suggest.

Last week, the Joint Committee on Taxation found that simply closing loopholes would lower taxes by only 4 percent, which some Democrats hailed as proof that the "base-broadening, rate-lowering" approach wouldn't be enough. But the CFRB points out that the JCT analysis made some big assumptions that left a lot of revenue on the table.

Instead, the group says, you should look at a 2005 study by the Bush Treasury Department if you actually wanted to see how much you could lower rates through abolishing nearly all possible tax expenditures.

According to that experiment, you could get the top rate as low as 23 percent by eliminating expenditures—a whopping 34 percent cut from the levels under the Bush tax cuts, while lowering deficits by $1.2 trillion. But no one's proposing to do that, because that would entail massive changes to the tax code that would hit low- and high-income Americans alike. 


(Source: CFRB)

The group makes a list of all the expenditures you'd have to get rid of to get the top rate down from the Clinton-era level of 39.6 percent (what the rate will be if the Bush tax cuts are allowed to expire at the end of the year) and the floor of 23 percent. That would, however, entail getting rid of a huge range of tax preferences that affect the vast majority of Americans. The exclusion that enables employers to provide health care plans for their workers? Gone. The child tax credit? No more. Breaks for small-businesses who file as individuals? Kaput.

The CFRB believes this breakdown is useful because "this 23 percent top rate can serve as a helpful starting point for thinking about bold tax reforms." But for others, it will underscore the JCT's essential point that it's hard to use expenditures as a way to pay for lowering rates, while still cutting the deficit, given what would have to be sacrificed. 

 

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Sarah Kliff · October 17, 2012