The vast majority of tax breaks in the U.S. tax code would be hard to cut because they promote important social goals or are “hugely popular” with voters, according to a new congressional analysis that casts doubt on Republican promises to substantially lower tax rates without adding to budget deficits.
The report, released this week by the nonpartisan Congressional Research Service, comes as both parties are pitching the idea that overhauling the tax code to throw out “special-interest” credits and deductions could raise more than $1 trillion a year in fresh revenue. Republicans want to use the cash to lower tax rates, while Democrats argue that a portion should be reserved for reining in record budget deficits.
Just this week, House Budget Committee Chairman Paul Ryan (R-Wis.) unveiled a 2013 budget blueprint that would lower the top income tax rate paid by the wealthiest households from 35 percent to 25 percent by wiping out “tax shelters” and “lobbyists’ loopholes.”
Such a sharp reduction in rates is theoretically possible, the CRS report says. Indeed, if Congress threw out every tax break that benefits U.S. households, federal tax collections could surge by more than $1 trillion a year. If all that money were returned to taxpayers in the form of lower rates, there would be more than enough cash to meet the GOP rate target without driving budget deficits higher.
But very little of that cash comes from special-interest tax shelters, the report says, noting that 90 percent of the money is currently lost to just 20 tax breaks that benefit millions of American families, such as the child credit and provisions for medical care and retirement savings.
“It appears unlikely that a significant fraction of this potential revenue could be realized,” says the report by CRS analysts Jane Gravelle and Thomas Hungerford.
Republican tax aides dismissed the report as unhelpful.
“Reports suggesting tax reform isn’t easy are greatly appreciated. We look forward to future reports on water being wet,” said Sage Eastman, a senior aide to House Ways and Means Committee Chairman Dave Camp (R-Mich.), whose panel drafted the principles for tax reform laid out in the Ryan budget.
Many tax breaks are not only hugely politically popular, the report says, but they also serve important policy objectives. As much as 30 percent of the revenue lost to individual tax breaks, for example, comes from provisions to encourage savings, such as preferential tax treatment for individual retirement accounts and employer pensions.
Another 11 percent benefits low-income families and the elderly, including tax-free Social Security and Medicare benefits. Other provisions have “important economic justifications,” the report says, such as tax breaks for capital gains when someone sells a home.
And fully 40 percent of the lost revenue would be difficult to capture under any circumstances, the report says, due to “serious administrative and technical barriers largely because they are in-kind benefits that cannot be easily or fairly valued,” such as employer-provided health insurance. Currently, health premiums paid by employers are not tallied as benefits in employee paychecks and are therefore not taxed.
Other provisions are “broadly used” and “highly popular,” the report noted, such as itemized deductions for mortgage interest, state and local taxes, and charitable contributions.
As much as 90 percent of the revenue currently lost to tax breaks “may be difficult to realize,” the report said, adding that the government could not be able to glean “more than $100 billion to $150 billion in additional tax revenues.”
Such small gains would not pay for any significant drops in tax rates, the report says, predicting that the savings would be able to finance only “a one or two percentage point reduction” in each tax bracket.
With the top federal income tax rate scheduled to pop back up to 39.6 percent next year, when the George W. Bush-era tax cuts expire, the analysis suggests that reducing tax breaks could generate only enough cash to bring the top tax rate down to 37 percent — hardly the stuff of GOP lawmakers’ dreams.