Learn More
Learn more about the options below with in-depth analysis of popular options, like changes to the U.S. corporate income tax, policies to help low-income households, ways to boost economic growth, and the most economically efficient options for raising revenue.
Prior to the pandemic-induced recession, the federal budget faced structural deficits that would become unsustainable over the long term. The fiscal response to the pandemic and recession drastically increased the budget deficit in 2020 and 2021. Even after the fiscal response and short-term effects of the pandemic fade, spending growth is set to well outpace revenue growth due to structural deficits driven by demographics, entitlement spending, and interest costs.
While the nascent recovery is not the appropriate time to engage in deficit-reduction efforts, particularly given that low interest rates imply ample room for a continuing fiscal policy response, lawmakers will eventually turn their attention toward addressing deficits.
It will be important that if, or more likely when, lawmakers look for ways to raise tax revenues, they keep in mind that tax increases come with trade-offs in terms of effects on economic output and revenue-raising potential.
Once the public health threat is mitigated and the economy has recovered, considering such trade-offs will help lawmakers avoid tax increases that would cause undue harm to the economy by reducing incentives to work and invest. In general, taxes on more mobile factors of production, such as capital, cause more distortions to economic incentives than taxes on less mobile factors, such as labor.
This chapter compares 37 changes to federal taxes on individual income, business income, payroll, select sales (excises), and estates and gifts.
- Raise Individual Income Tax Rates by 10 Percent
- Repeal the Tax Cuts and Jobs Act (TCJA) Individual Tax Changes
- Revert to Pre-2018 Individual Income Tax Rates on Income Over $400,000
- Add a New Bracket of 45 Percent for Income Above $750,000
- Create an Additional Flat Individual Income Tax of 5%
- Eliminate the Child Tax Credit
- Reduce the Child Tax Credit to $500
- Eliminate the Earned Income Tax Credit
- Eliminate the Federal Income Tax Deduction for State and Local Taxes
- Eliminate the Home Mortgage Interest Deduction
- Lower the Home Mortgage Interest Deduction Cap to $500,000 in Principal
- Eliminate the Charitable Deduction
- Limit Tax Savings from Itemized Deductions to 28 Percent of Value
- Eliminate the Tax Exclusion for Municipal Bond Interest
- Tax Carried Interest as Ordinary Income
- Raise the Top Capital Gains and Dividend Tax Rate to 30%
- Raise Top Capital Gains Rate to 39.6 Percent on Income Above $1 Million
- Eliminate the Exclusion of Capital Gains on Principal Residences
- Institute a Wealth Tax
- Increase Employer- and Employee-side Payroll Tax by 1 Percentage Point Split
- Eliminate the Social Security Payroll Tax Cap
- Apply the Social Security Payroll Tax to Wages Above $400,000
- Raise the Corporate Income Tax
- Institute a Corporate Surtax of 5 Percent
- Eliminate the Section 199A Deduction
- Require Amortization of Advertising Expenses over 10 Years
- Return to Alternative Depreciation Schedule (ADS)
- Repeal Last-in, First-out (LIFO) Inventory Accounting
- Eliminate 1031 Like-Kind Exchanges
- Enact a 5% Value Added Tax
- Return the Estate Tax to Clinton-era Levels
- Eliminate Step-Up in Basis on Capital Gains
- Lower the Estate and Gift Tax Exemption Amount to $2 Million
- Increase the Gas Tax by 15 Cents Per Gallon and Inflation Adjust Going Forward
- Increase the Gas Tax by 35 Cents Per Gallon and Inflation Adjust Going Forward
- Reinstate the Cadillac Tax
- Institute a Carbon Tax
Choose a Tax Reform Option
Compare all optionsOption 50Institute a Carbon Tax
Due to concerns about government deficits and climate change, some lawmakers have proposed enacting a carbon tax. Such a tax mainly targets fossil fuels—such as oil, gas, and coal—used for heating purposes, as well as motor fuels. As a “Pigouvian tax,” the carbon tax is designed to make business and individuals that benefit from burning fossil fuels shoulder the social cost of environmental damage. Taxing carbon emissions would raise the price of fossil fuels and any resulting goods or services, thus serving as an incentive for producers and consumers to use less carbon-intensive goods.
This option would enact a carbon tax of $25 per metric ton of carbon produced through fossil fuels combustion, increasing at 5 percent annually to $38.78 per metric ton by 2031. This option would raise $998.9 billion over the next decade, on a conventional basis, and reduce GDP by 0.2 percent, resulting in a slightly regressive reduction in after-tax income.
Economic Effects
- -0.2% Gross Domestic Product
- -0.2% Gross National Product
- -0.1% Capital Stock
- -149k Full-Time Equivalent Jobs
- -0.7% Wage Rate
Budgetary Effects
- $998.87 Billion Static 10-Year Revenue
- $860.50 Billion Dynamic 10-Year Revenue
| Income Group | Percent Change in After Tax Income | ||
|---|---|---|---|
| Conventional, 2022 | Conventional, 2031 | Long Run Dynamic | |
| 0% to 20% | -0.5% | -0.5% | -0.7% |
| 20% to 40% | -0.4% | -0.4% | -0.6% |
| 40% to 60% | -0.5% | -0.4% | -0.6% |
| 60% to 80% | -0.4% | -0.4% | -0.6% |
| 80% to 100% | -0.4% | -0.4% | -0.5% |
| 90% to 95% | -0.4% | -0.4% | -0.6% |
| 95% to 99% | -0.4% | -0.4% | -0.6% |
| 99% to 100% | -0.3% | -0.3% | -0.5% |
| Total | -0.4% | -0.4% | -0.6% |
Options Comparison Table
Tax Reform Option | Long-Run Change in GDP | Full-Time Equivalent Jobs | Wage Rate | Static 10-Year Revenue (billions) | Dynamic 10-Year Revenue (billions) |
|---|---|---|---|---|---|
| 1: Lower Individual Income Tax Rates Across the Board (Lower All Rates by 10%) | +0.9% | 975,398 | +0.1% | -$2,257.31 | -$1,713.77 |
| 2: Lower the Top Marginal Income Tax Rate (25% Top Rate) | +1.1% | 1,033,707 | +0.2% | -$2,209.23 | -$1,673.87 |
| 3: Consolidate Current Brackets into Three: 10 percent, 25 percent, and 35 percent | +1.3% | 1,336,191 | +0.1% | -$2,694.50 | -$2,167.24 |
| 4: Reduce Employer- and Employee-Side Payroll Tax by 1 Percentage Point Split (1 Percentage Point Split) | +0.2% | 179,340 | 0% | -$651.84 | -$545.44 |
| 5: Lower the Top Rate on Capital Gains and Dividends to 15 Percent | < +0.05% | 6,526 | < +0.05% | -$151.11 | -$148.73 |
| 6: Index Capital Gains Realizations to Inflation | < +0.05% | 8,615 | < +0.05% | -$143.65 | -$143.40 |
| 7: Make 100 Percent Bonus Depreciation Permanent | +0.5% | 86,457 | +0.4% | -$213.42 | -$110.19 |
| 8: Implement Neutral Cost Recovery for Structures | +1.2% | 230,766 | +1.0% | -$10.35 | $300.98 |
| 9: Cancel the Amortization of Research and Development Expenses | +0.1% | 19,550 | +0.1% | -$131.30 | -$107.90 |
| 10: Make Section 199A Deduction Permanent | +0.2% | 57,906 | +0.1% | -$438.70 | -$391.20 |
| 11: Lower the Corporate Tax Rate (Lower to 15%) | +0.5% | 100,937 | +0.4% | -$978.94 | -$847.71 |
| 12: Lower the Estate Tax Rate to 30 Percent | < +0.05% | 7,236 | < +0.05% | -$81.94 | -$79.47 |
| 13: Repeal Tariffs Imposed Under Sections 232, 201, and 301 | +0.1% | 82,960 | +0.5% | -$758.99 | -$664.85 |
| 14: Raise Individual Income Tax Rates by 10 Percent | -0.9% | -960,735 | -0.1% | $2,103.78 | $1,515.02 |
| 15: Repeal the Tax Cuts and Jobs Act (TCJA) Individual Tax Changes | 0% | 0 | 0% | $829.72 | $648.75 |
| 16: Revert to Pre-2018 Individual Income Tax Rates on Income Over $400,000 | < -0.05% | 0 | < +0.05% | $107.29 | $85.43 |
| 17: Add a New Bracket of 45 Percent for Income Above $750,000 | -0.2% | -165,888 | -0.1% | $576.22 | $441.05 |
| 18: Create an Additional Flat Individual Income Tax of 5% | -2.1% | -2,220,324 | -0.1% | $6,485.00 | $5,007.21 |
| 19: Eliminate the Child Tax Credit | +0.1% | 99,527 | < +0.05% | $890.72 | $917.22 |
| 20: Reduce the Child Tax Credit to $500 | < +0.05% | 43,923 | < -0.05% | $593.35 | $585.22 |
| 21: Eliminate the Earned Income Tax Credit | +0.2% | 273,081 | < +0.05% | $607.79 | $772.99 |
| 22: Eliminate the Federal Income Tax Deduction for State and Local Taxes | -0.7% | -492,252 | -0.3% | $1,563.55 | $1,283.17 |
| 23: Eliminate the Home Mortgage Interest Deduction | -0.7% | -366,838 | -0.4% | $1,073.53 | $832.83 |
| 24: Lower the Home Mortgage Interest Deduction Cap to $500,000 in Principal | -0.1% | -29,557 | < -0.05% | $147.51 | $132.22 |
| 25: Eliminate the Charitable Deduction | -0.1% | -90,202 | < -0.05% | $747.40 | $694.52 |
| 26: Limit Tax Savings from Itemized Deductions to 28 Percent of Value | -0.1% | -63,819 | < -0.05% | $212.96 | $184.19 |
| 27: Eliminate the Tax Exclusion for Municipal Bond Interest | < -0.05% | -11,152 | < -0.05% | $192.84 | $191.84 |
| 28: Tax Carried Interest as Ordinary Income | < -0.05% | -9,347 | < -0.05% | $20.33 | $18.50 |
| 29: Raise the Top Capital Gains and Dividend Tax Rate to 30% | < -0.05% | -10,024 | < -0.05% | $67.00 | $61.82 |
| 30: Raise Top Capital Gains Rate to 39.6 Percent on Income Above $1 Million | -0.1% | -14,699 | -0.1% | -$123.51 | -$132.92 |
| 31: Eliminate the Exclusion of Capital Gains on Principal Residences | -0.3% | -65,000 | -0.3% | $661.90 | $617.30 |
| 32: Institute a Wealth Tax | -0.8% | -148,638 | -0.7% | $2,194.40 | $1,936.40 |
| 33: Increase Employer- and Employee-side Payroll Tax by 1 Percentage Point Split (1 Percentage Point Split) | -0.2% | -179,965 | 0% | $672.66 | $563.43 |
| 34: Eliminate the Social Security Payroll Tax Cap | -1.2% | -1,299,589 | 0% | $1,546.63 | $1,288.30 |
| 35: Apply the Social Security Payroll Tax to Wages Above $400,000 | -0.2% | -226,014 | 0% | $822.79 | $686.04 |
| 36: Raise the Corporate Income Tax (28% CIT Rate) | -0.7% | -138,309 | -0.6% | $886.27 | $693.90 |
| 37: Institute a Corporate Surtax of 5 Percent | -0.1% | -16,423 | -0.1% | $141.10 | $119.00 |
| 38: Eliminate the Section 199A Deduction | < -0.05% | 0 | < +0.05% | $208.23 | $200.28 |
| 39: Require Amortization of Advertising Expenses over 10 Years | -0.1% | -18,199 | -0.1% | $226.50 | $206.40 |
| 40: Return to Alternative Depreciation Schedule (ADS) | -0.6% | -108,511 | -0.5% | $603.40 | $421.25 |
| 41: Repeal Last-in, First-out (LIFO) Inventory Accounting | < -0.05% | -4,926 | < -0.05% | $60.20 | $56.04 |
| 42: Eliminate 1031 Like-Kind Exchanges | < -0.05% | -2,500 | < -0.05% | $13.84 | $13.63 |
| 43: Enact a 5% Value Added Tax | -1.2% | -930,686 | -4.0% | $6,091.67 | $5,223.56 |
| 44: Return the Estate Tax to Clinton-era Levels | -0.2% | -41,415 | -0.2% | $887.40 | $823.90 |
| 45: Eliminate Step-Up in Basis on Capital Gains | -0.1% | -8,489 | -0.1% | $124.18 | $118.46 |
| 46: Lower the Estate and Gift Tax Exemption Amount to $2 Million | < -0.05% | -5,592 | < -0.05% | $337.20 | $332.10 |
| 47: Increase the Gas Tax by 15 Cents Per Gallon and Inflation Adjust Going Forward | -0.1% | -50,359 | -0.2% | $332.60 | $286.24 |
| 48: Increase the Gas Tax by 35 Cents Per Gallon and Inflation Adjust Going Forward | -0.1% | -103,204 | -0.5% | $758.34 | $653.12 |
| 49: Reinstate the Cadillac Tax | < -0.05% | -37,800 | -0.2% | $247.72 | $215.55 |
| 50: Institute a Carbon Tax ($25 per Ton) | -0.2% | -148,859 | -0.7% | $998.87 | $860.50 |
| 51: Double EITC for Workers without Qualifying Children to $1,075 | < +0.05% | 6,035 | < +0.05% | -$35.52 | -$34.32 |
| 52: Reform the EITC for Married and Unmarried Workers, with and without Children | +0.1% | 96,644 | 0% | -$164.04 | -$105.71 |
| 53: Make Child Tax Credit Fully Refundable | < -0.05% | -15,328 | < -0.05% | -$72.30 | -$92.29 |
| 54: Make Child Tax Credit First Dollar Refundable | < -0.05% | -14,698 | < -0.05% | -$37.00 | -$43.90 |
| 55: Restructure the Child Tax Credit and Earned Income Tax Credit | +0.1% | 86,986 | < -0.05% | -$1,414.40 | -$1,379.00 |
| 56: Increase the Standard Deduction by 25% for All Filing Groups | < +0.05% | 69,883 | < -0.05% | -$622.66 | -$558.51 |
| 57: Restore the Personal Exemption | 0% | 0 | 0% | -$774.40 | -$660.45 |
| 58: Make Charitable Deduction "Above-the-Line" | < -0.05% | 15,697 | < -0.05% | -$289.30 | -$285.42 |
| 59: Tax Individual Incomes at a Flat 30% Rate (20% Flat Tax) | +1.3% | 1,211,491 | +0.3% | $1,148.80 | $1,625.93 |
| 60: Eliminate the Individual Alternative Minimum Tax | -0.1% | -113,171 | 0% | -$395.08 | -$436.17 |
| 61: Permanently Eliminate the Pease Limitation on Itemized Deductions | +0.1% | 77,730 | < +0.05% | -$160.83 | -$125.58 |
| 62: Make the 2017 Tax Law Standard Deduction, Personal Exemption, and CTC Permanent | -0.3% | -167,663 | -0.1% | $154.91 | $71.62 |
| 63: Implement $2,500 per Year Roth-style Universal Savings Accounts | 0% | 748 | 0% | -$15.08 | -$14.99 |
| 64: Eliminate the Net Investment Income Tax | < +0.05% | 8,781 | < +0.05% | -$275.07 | -$271.17 |
| 65: Enact Full Expensing for All Capital Investment | +2.3% | 441,769 | +1.9% | -$1,707.41 | -$1,166.66 |
| 66: Maintain Limitation on Interest Deductibility at 30 Percent of EBITDA | +0.1% | 18,832 | +0.1% | -$65.84 | -$45.90 |
| 67: Eliminate Various Business Tax Expenditures | -0.2% | -33,000 | -0.2% | $985.60 | $926.43 |
| 68: Replace the Corporate Income Tax with a 5 Percent Value-Added Tax (VAT) | +0.4% | 122,000 | +0.5% | $2,772.55 | $2,349.32 |
| 69: Eliminate Estate and Gift Taxes | +0.1% | 21,930 | +0.1% | -$293.90 | -$267.10 |
| 70: Increase Alcohol Excise Taxes to $16 per Proof Gallon and Index to Inflation | < -0.05% | -22,718 | -0.1% | $136.07 | $129.14 |
Learn More
To learn about each option here, or for assitance modeling other tax reform ideas, please contact us.