Progressive revenue options: Descriptions and scores

The current election season has seen a growing number of truly ambitious plans for expanding social insurance and public investments in the U.S. economy. Once the economy unambiguously locks in full employment, many of these plans should be financed by higher taxes rather than debt.

Given the stark rise in inequality over the past four decades (Bivens and Mishel 2015), it makes sense that the first tranche of revenues to pay for these current and possible future commitments to public spending should come from those at the top. In this report, we provide detailed 10-year estimates for options to raise revenue in a progressive manner, as well as brief explanations of the various proposals.

Unless otherwise noted, revenue estimates are largely taken from Tax Policy Center (TPC) scores of our Budget for Shared Prosperity, put together for the Peter G. Peterson Foundation’s “Solutions Initiative” (Blair 2019a, 2019b; Peter G. Peterson Foundation 2019). A capsule description and score for each can be found in Table 1 at the end of this report.

Individual income taxes

Construct fairer income rates and brackets

Largely sparked by a 60 Minutes interview in which Rep. Alexandria Ocasio-Cortez (D-N.Y.) suggested a top marginal tax rate of 70% (Picchi 2019), policy discussions in Washington are finally taking much higher top marginal tax rates seriously.

In the past decade, the mantle of higher marginal tax rates for those at the top was taken up by Rep. Jan Schakowsky (D-Ill.), whose Fairness in Taxation Act includes significantly higher tax rates for millionaires and billionaires (Schakowsky 2011).

In our Budget for Shared Prosperity, we make our own proposal for higher marginal tax rates, particularly at the top end. Our proposal combines rates and brackets from before both the Bush and Trump administration’s tax cuts, along with Rep. Schakwosky’s Fairness in Taxation Act. Specific rates and brackets for single filers (doubled for married filers) in our plan are detailed in Blair 2019a.

TPC has estimated that our particular proposal would raise about $2.7 trillion over 10 years. The more important point, however, is simply the recognition that there is room for raising the top marginal rate on ordinary income to raise revenue progressively (Fieldhouse 2013).

Assess a surtax on annual income of the rich

The rates and brackets listed above constitute a full rewrite of the income tax system. Failing that sort of broad reform, a subset of this would be the addition of a surtax on the incomes of the very rich. One such proposal is to assess a 10-percentage-point surtax on adjusted gross income (AGI) in excess of $1 million for single filers (and $2 million for joint filers). Importantly, such a surtax would apply to both income from work and income from wealth. The Tax Policy Center has estimated this surtax would raise about $634 billion in additional revenues over 10 years (ATF 2019b) and there are reasons to believe this amount could be substantially increased with some basic reforms to how capital income is taxed (see below).

Tax capital income using a mark-to-market approach

Every year, workers pay income taxes on what they earn from their labor, while high-income households that make their money from capital income can defer taxes until they “realize” these gains. Drawing on details from reports by Kamin (2016) and Toder and Viard (2016), we propose applying the capital gains tax on unrealized capital gains, not just realized gains. This proposal would ensure that high-income households are paying the taxes they owe on their increase in wealth annually. The proposal is estimated to raise $1.8 trillion over 10 years.

Tax all income equally

By far the largest, and most politically ambitious, proposal in our Budget for Shared Prosperity is doing away with every single deduction, exemption, and credit in the individual income tax system except for the Earned Income Tax Credit (EITC). These deductions, exemptions, and credits are often referred to as tax expenditures, because they operate as “spending through the tax code” that is ostensibly meant to encourage socially desirable actions like saving for retirement or investing in productive plants and equipment. But tax expenditures are regressive, largely benefiting the top 20%, and the social benefits they are meant to provide could be provided more equitably and efficiently through direct government spending (Blair 2019b).

While it would be politically difficult to close these loopholes, the revenue potential of doing so is immense—on the order of paying for Medicare for All (Blair 2019b). Our proposal to tax all income equally would raise $15.4 trillion over 10 years.

Tax wealth like work

If abolishing each and every tax expenditure is unrealistic (especially in the short run), we can prioritize those tax expenditures that are most regressive and would therefore be most beneficial to close for distributional reasons. A particularly regressive tax expenditure is the preferential tax rate applied to income from capital gains and dividends. There is no convincing economic case to be made for taxing capital income at a lower rate than income earned from work (Blair 2019b). And the preferential rate on capital income is extraordinarily regressive, with the top 1% getting 75% of the benefits (TPC 2018a).

Closing this loophole requires other reforms of the capital taxation system to ensure that rich taxpayers don’t dodge the taxes they owe, but the Institute on Taxation and Economic Policy (ITEP) estimates that doing so would raise $2.4 trillion over 10 years (ATF 2019a).

Repeal the 20% deduction for certain business income

The Tax Cuts and Jobs Act (TCJA) created a new loophole that is purportedly for “small businesses” via its deduction for pass-through business income. Despite the claim that it’s meant to help small businesses, 55% of the deduction goes to the top 1% (TPC 2018b). Not only do the benefits flow to high-income households, but this new loophole rewards tax avoidance that these business owners are already engaging in, typically through convoluted ownership structures (Cooper et al. 2015). High-income owners of pass-through income drive much of the “tax gap”—the difference between total taxes owed and taxes paid on time (Jacoby 2019). The loophole has no economic rationale, and its detrimental effects have already been seen in Kansas (Blair 2016). Getting rid of this loophole would raise $387 billion over 10 years (ATF 2019a).

Expand the EITC to all working adults

In 2018, the EITC pulled 5.6 million people out of poverty (CBPP 2019). But one group that does not benefit due to the current structure of the EITC is low-income childless adults, who receive far smaller EITCs (Marr and Huang 2019). Expanding the EITC to give this group larger benefits would fight poverty and would also make the EITC a more effective complement to state-level minimum wage increases spreading throughout the country (Rothstein and Zipperer 2020). Our proposal to increase the EITC for childless adults and noncustodial parents would cost just $43 billion over 10 years.

Close wealth loopholes to strengthen Medicare

Some rich owners of pass-through business are able to avoid the Net Investment Income Tax, an additional tax on high-income households created by the Affordable Care Act. Closing this loophole would raise $209 billion over 10 years.

Social insurance taxes

Shield Social Security from rising inequality

Currently only earnings up to a maximum of $137,700 are taxed by Social Security payroll taxes (SSA 2020). This taxable maximum rises each year by the amount that average wages rise. But because the earnings of those above the cap have tended to rise much faster than average earnings in recent decades (a sign of rising inequality), the share of total earnings subject to the Social Security tax has fallen. Following the last major reform to Social Security, 90% of taxable earnings were covered in 1983 (CBO 2018a). But the rise in income inequality since then has meant that as of 2016 only 83% of earnings were covered. Reversing this trend by setting the cap to capture 90% of earnings in each year would raise $1.2 trillion in revenue over 10 years, according to TPC estimates.

Close the business payroll tax loophole

Currently, workers contribute to Social Security and Medicare through Federal Insurance Contributions Act (FICA) payroll taxes on their earnings. Similarly, sole proprietors contribute to Social Security and Medicare through Self-Employment Contributions Act (SECA) payroll taxes on their net business income. But some owners of different types of pass-through businesses are able to avoid some of the SECA taxes they should owe (CBO 2018b). Closing this loophole would raise $170 billion over 10 years, according to TPC estimates.

Corporate income taxes

Restore responsible corporate tax rates

The TCJA lowered the rate on corporate income from 35% to 21%. Evidence prior to the passing of the TCJA was overwhelming that the benefits of corporate rate cuts go to those at the top of the income distribution (Bivens and Blair 2017, 2018). And new data since the TCJA passed does nothing to change this view (Blair 2019c). Returning the corporate income tax rate to 35% would be extraordinarily progressive and is estimated to raise about $1.4 trillion over 10 years.

End offshore outsourcing

Prior to the TCJA, U.S. multinationals avoided taxes by booking trillions of dollars in profits offshore in tax havens (Clemente, Blair, and Trokel 2016). The pre-TCJA law allowed firms to defer taxes until the profits were repatriated to owners in the United States. The TCJA did little to fix this, and the TCJA may even incentivize the offshoring of jobs along with profits (Wamhoff 2018). Essentially, the TCJA moved the United States to a “territorial” tax system where most profits earned abroad are essentially untaxed by the U.S. government.

We propose moving to a worldwide system with a 35% tax rate on corporate income, but removing the option for firms to defer taxation. This option would require strong “anti-inversion” provisions to keep firms from trying to declare themselves no longer “American” companies subject to U.S. taxation, even as the bulk of their sales and workforces (and even managerial workforce) resides in the United States. This reform could be accomplished by following the parameters of Rep. Doggett (D-Texas) and Sen. Whitehouse’s (D-R.I.) No Tax Breaks for Outsourcing Act (Doggett 2018). TPC estimates this would raise $619 billion over 10 years.

Close corporate tax loopholes

The corporate tax code is littered with loopholes that allow highly profitable corporations to avoid paying the full taxes they owe (Clemente, Blair, and Trokel 2016). Our Budget for Shared Prosperity proposes getting rid of almost every single corporate tax expenditure. This proposal is estimated to raise $456 billion over 10 years.

Estate and gift and wealth taxes

Tax inherited wealth fairly and close estate tax loopholes

The estate tax has been drastically eroded by legislation passed since 2001, with only 0.1% of estates paying any estate tax today (CBPP 2018). And even when estates do owe taxes, large loopholes allow many wealthy estates to avoid them (Huang and Cho 2017). Our proposal would reinstitute estate tax exemptions and rates from the early 2000s and close the various loopholes that riddle the estate tax, using the parameters of Sen. Bernie Sanders’ (I-Vt.) Responsible Estate Tax Act (Senate Budget Committee 2015). Combined, these two actions would raise $689 billion over 10 years.

Replace estate and gift taxes with an inheritance tax

Another option for taxing inherited wealth is to better target large inheritances by replacing the current tax, based on large overall estates, with a tax based just on the amount inherited by the beneficiary. A proposal for this was put forth by Lily Batchelder of the Washington Center for Equitable Growth (Batchelder 2016). Implementation of Batchelder’s proposal could raise as much as $670 billion over 10 years (ATF 2019a).

Tax the richest’s wealth holdings

The Democratic presidential primary has put discussions of a wealth tax front and center in Washington policy discussions. Our proposal, for progressive rates on wealth that start at 0.1% on net worth above $10 million and cap out at 1% for net worth above $19 million, would raise about $1.4 trillion over 10 years.

Excise and other taxes

Institute a carbon tax and dividend to fight climate change

A carbon tax by itself would be regressive, as consumption is a higher share of income for nonrich households. Because of this, most proposals to impose a carbon tax include a measure to recycle the money raised—often in a progressive manner—to shield the living standards of low- and moderate-income households. These rebates mean that a carbon tax and refund tends to be revenue-neutral, but we still include this proposal among our progressive revenue options because the overall economic benefits of mitigating climate change are large and progressive.

Enact a Wall Street speculation tax

There is strong evidence that the marginal value of financial transactions in the U.S. economy are near-zero, or even negative (Bivens and Blair 2016). That is, today’s financial markets largely extract economic rents by overcharging users for financial intermediation. With much of this rent extraction stemming from excessive churn, a well-designed financial transactions tax (FTT) has the potential to dampen the rents that the financial sector siphons off from the rest of the economy by reducing speculative trading and encouraging more productive investment. TPC estimates that the FTT in our Budget for Shared Prosperity would raise about $1.1 trillion over 10 years, while we think there’s potential for a well-designed FTT to raise considerably more (Bivens and Blair 2016).

Tax too-big-to-fail banks

The global financial crisis of 2008 showed plainly the substantial risks associated with a financial sector heavily reliant on “systemically important financial institutions” (SIFIs), or banks that are “too big to fail.” A financial fee of 0.15% on certain liabilities of SIFIs would raise $99 billion over 10 years.

Table 1

Progressive revenue options: Estimated revenue raised by each option, 2019–2029 (in billions of dollars)

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2020–2029
GDP 21,141 22,059 22,899 23,756 24,660 25,621 26,629 27,640 28,709 29,837 31,039 262,849
Individual income taxes
Fairer income rates and brackets1 0 253 352 370 390 412 434 172 88 92 97 2,659
Surtax on annual income of the rich2 23 52 54 58 62 67 71 76 82 87 634
Mark-to-market taxation of capital income1 0 -23 31 93 142 187 228 251 281 313 344 1,846
Taxing income equally1 0 926 1,297 1,350 1,417 1,492 1,570 1,710 1,805 1,891 1,982 15,439
Reforming existing capital gains taxes2 0 154 214 222 230 239 248 258 268 278 289 2,400
Repealing 20% deduction for certain business income2 0 25 34 36 37 39 40 42 43 45 47 387
Expanding the EITC to all working adults1 0 -3 -4 -4 -4 -4 -5 -5 -5 -5 -5 -43
Closing wealth loopholes to strengthen Medicare1 0 10 17 18 19 20 22 23 25 27 29 209
Social insurance taxes
Shielding Social Security from inequality1 0 77 106 110 113 118 123 126 131 135 139 1,178
Closing business payroll tax loopholes1 0 7 13 15 16 18 19 19 20 21 22 170
Corporate income taxes
Restoring responsible corporate tax rates1 0 61 106 115 128 143 155 167 174 181 188 1,418
Ending offshore outsourcing1 0 68 66 64 62 63 63 60 57 58 59 619
Closing corporate tax loopholes1 0 21 47 45 39 42 45 49 52 56 60 456
Estate and gift and wealth taxes
Taxing inherited wealth fairly and closing estate tax loopholes1 0 7 52 60 69 78 84 87 79 84 89 689
Replacing estate and gift taxes with an inheritance tax2 0 43 60 62 64 67 69 72 75 78 81 670
Taxing richest’s wealth holdings1 0 89 121 126 130 136 141 146 152 158 164 1,363
Excise and other taxes
Carbon tax and dividend to fight climate change3 0 0 0 0 0 0 0 0 0 0 0 0
Wall street speculation tax1 -77 -50 68 122 129 130 132 133 134 136 137 1,072
Taxing too-big-to-fail banks1 0 10 10 10 10 10 10 10 10 10 9 99

Notes: Numbers represent net effects of a policy, which may include some spending changes. Where only 10-year scores were provided, annual estimates are made by holding revenues constant as a share of GDP. Numbers may not add due to rounding. Tax Policy Center scoring of EPI’s Budget for Shared Prosperity2 Estimates from Americans for Tax Fairness reports. 3 Carbon tax and dividend are revenue-neutral by design and thus are not scored.

Sources: Tax Policy Center estimates; Americans for Tax Fairness, Fair Taxes Now: Revenue Options for a Fair Tax System (April 2019); Americans for Tax Fairness, Tax Policy Center Revenue Estimates for 10% Surtax (October 2019)

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References

Americans for Tax Fairness (ATF). 2019a. Fair Taxes Now: Revenue Options for a Fair Tax System. April 2019.

Americans for Tax Fairness (ATF). 2019b. Tax Policy Center Revenue Estimates for 10% Surtax. October 2019.

Batchelder, Lily. 2016. The “Silver Spoon” Tax: How to Strengthen Wealth Transfer Taxation. Washington Center for Equitable Growth, October 2016.

Bivens, Josh, and Hunter Blair. 2016. A Financial Transactions Tax Would Help Ensure Wall Street Works for Main Street. Economic Policy Institute, July 2016.

Bivens, Josh, and Hunter Blair. 2017. “Competitive” Distractions: Cutting Corporate Tax Rates Will Not Create Jobs or Boost Incomes for the Vast Majority of American Families. Economic Policy Institute, May 2017.

Bivens, Josh, and Hunter Blair. 2018. “The Likely Economic Effects of the Tax Cuts and Jobs Act (TCJA): Higher Incomes for the Top, No Discernible Effect on Wage Growth for Typical American Workers.” Testimony submitted to the Tax Policy Subcommittee of the U.S. House of Representatives Ways and Means Committee, June 1, 2018.

Bivens, Josh, and Lawrence Mishel. 2015. Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay: Why It Matters and Why It’s Real. Economic Policy Institute, September 2015.

Blair, Hunter. 2016. “How Bad Are Trump’s Policy Instincts? He’s Taking Tax Advice from Kansas Governor Sam Brownback.” Working Economic Blog (Economic Policy Institute), April 26, 2016.

Blair, Hunter. 2019a. “Detailed Estimates for Policies in EPI’s ‘Budget for Shared Prosperity’.” Working Economics Blog (Economic Policy Institute), July 29, 2019.

Blair, Hunter. 2019b. EPI’s Model Federal Budget and Tax Plan: How We Can Raise the Revenue Needed to Provide Universal Health Care, Strengthen Safety Nets, and Shore Up Public Investment. Economic Policy Institute, July 2019.

Blair, Hunter. 2019c. “On Its Second Anniversary, the TCJA Has Cut Taxes for Corporations, but Nothing Has Trickled Down.” Working Economics Blog (Economic Policy Institute), December 2019.

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Center on Budget and Policy Priorities (CBPP). 2019. Policy Basics: The Earned Income Tax Credit. December 2019.

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Jacoby, Samantha. 2019. “Policymakers Should Ensure Pass-Throughs Pay More of the Taxes They Owe.” Off the Charts (Center on Budget and Policy Priorities blog), November 22, 2019.

Kamin, David. 2016. Taxing Capital: Paths to a Fairer and Broader U.S. Tax System. Washington Center for Equitable Growth, August 2016.

Marr, Chuck, and Yixuan Huang. 2019. Childless Adults Are Lone Group Taxed into Poverty: EITC Expansion Could Address This Problem. Center on Budget and Policy Priorities, June 2019.

Peter G. Peterson Foundation. 2019. “Solutions Initiative 2019” (web page).

Picchi, Aimee. 2019. “Does Alexandria Ocasio-Cortez Want to ‘Soak the Rich’?” CBS News, January 7, 2019.

Rothstein, Jesse, and Ben Zipperer. 2020. The EITC and Minimum Wage Work Together to Reduce Poverty and Raise Incomes. Economic Policy Institute, January 2020.

Schakowsky, Jan. 2011. “Schakowsky Introduces Bill to Tax Millionaires and Billionaires” (press release). Office of U.S. Congresswoman Jan Schakowsky, March 16, 2011.

Senate Budget Committee. 2015. Fact Sheet: The Responsible Estate Tax Act. July 2015.

Social Security Administration (SSA). 2020. Fact Sheet: 2020 Social Security Changes.

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Tax Policy Center (TPC). 2018b. “Model Estimates: T18-0213 – Tax Benefit of the 20 Percent Deduction for Qualified Pass-Through Business Income, Baseline: Current Law, Distribution of Federal Tax Change by Expanded Cash Income Percentile, 2018” (data table). October 2018.

Toder, Eric, and Alan Viard. 2016. A Proposal to Reform the Taxation of Corporate Income. Tax Policy Center, June 2016.

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