Tax increases were considered a dead issue in the discussions leading up to the recent budget deal negotiated by Sen. Murray and Rep. Ryan. The main justification for this position was that tax reform is imminent, and changes to the tax system could be better handled by the experts on the Ways and Means Committee. This argument has been repeated over and over, but it is meaningless. To begin with, the House GOP leadership has made it clear that tax reform will have to be revenue neutral—that is, no revenue increases—so waiting for a tax reform bill in the context of a budget deal makes no sense. Second, the House GOP leadership has made it clear that tax reform will not be considered, let alone introduced, this year. The prospects for tax reform in the next year or the next Congress are, at best, dim. So there was no serious excuse for not increasing tax revenues in the budget deal.

Wholesale tax reform, however, is not needed to increase tax revenues; just a few tweaks to the tax system could raise enough revenue to extend unemployment insurance benefits for the long-term unemployed and provide substantial relief from the sequester over the next 10 years. The table below lists six tax changes, with revenue estimates, courtesy of the Congressional Budget Office and the Joint Committee on Taxation. The six changes, which would increase taxes on those taxpayers most able to pay, are:

• Repeal “Last In, First Out” (LIFO) and “Lower of Cost or Market” inventory methods. To determine taxable income, firms subtract the cost of generating their income, which includes attaching a value to inventory. Several inventory valuation methods are available to the firm. LIFO allows the firm to assume that the last goods added to inventory were the first ones sold when valuing inventory. Repealing these methods would align tax accounting rules with how firms actually conduct business.
• Tax carried interest as ordinary income. Investment fund general partners receive part of their compensation as a profit share or carried interest, which is taxed as investment income (i.e., capital gains or dividends) at the reduced capital gains tax rate rather than as ordinary income. The proposal would treat carried interest that is due to management services as ordinary earnings, which would also be subject to payroll taxes; carried interest due to investments of the general partner would continue to be taxed as investment income at reduced tax rates.
• Increase tax rate on capital gains and dividends by 2 percentage points. This change would increase the top tax rate on capital gains and dividends from 20 percent to 22 percent. This tax rate is lower than the 28 percent top tax rate that President Reagan signed into law in 1986.
• Limit the value of itemized deductions to 28 percent. This would affect only the richest 3 percent of taxpayers by limiting the value of itemized deductions to 28 percent.
• Tax investment income from life insurance and annuity contracts (known as “inside build-up”). Policyholders as well as insurance companies pay no tax on investment income as it accumulates, only when paid out if at all. Each year, insurance companies would notify policyholders of investment income so they can include it as taxable income on their tax return.
• Increase the maximum taxable earnings under the Social Security payroll tax so that 90 percent of covered earnings are taxed. For 2014, this would increase the earnings cap from $117,500 to $177,500 and make the payroll tax a little less regressive.

The 2011 Budget Control Act was enacted with the goal of reducing budget deficits by over $2 trillion over the next 10 years. It initially cut discretionary spending by about $900 billion, and created a “Super Committee” to find an additional $1.5 trillion in 10-year deficit reduction. As is well known, the Super Committee was not so super, and its failure triggered the sequester—an additional $1.2 trillion in automatic 10-year spending reductions, to be split between defense and nondefense spending. Unfortunately, it seems that everyone is reconciled to living under this new budget scenario.

The resulting $2.1 trillion cut in spending is a tea partier’s dream. Yet we should keep in mind that our long-term fiscal issues are due to the GOP’s refusal to pay for the goods, services and benefits that the public wants from the federal government, and that we were paying for as late as 2001. In this light, it is difficult to argue that the budget deal is a major achievement, since it does not raise additional tax revenue, leaves in place much of the damaging spending reductions from the BCA, ignores the current unemployment problem, and does little to reduce the long-term mismatch between spending and revenues.