Reducing the Deficit by Increasing Individual Income Tax Rates
This paper examines whether raising just the top two or three individual income tax rates alone could put the debt on a sustainable path and what the rates would be under several different scenarios.
The Pew Fiscal Analysis Initiative provides independent and unbiased information to policy makers and the public as they consider the major policy issues facing our nation. A major component of our work has focused on the federal debt, examining the possible remedies that could put the country on a sustainable path. For example, the September 2010 report, "No Silver Bullet: Paths for Reducing the Federal Debt", showed what it would take to bring the debt-to-GDP ratio to 60 percent using just spending cuts or tax increases alone, as well as combining the remedies. The 60 percent debt-to-GDP goal is a level recommended as sustainable by the International Monetary Fund, the European Union, and the Peterson-Pew Commission on Budget Reform.
In November 2011, the Pew Budget Challenge was launched. This interactive web tool lets the user simulate the difficult choices facing federal policy makers as they try to bring the debt down to a sustainable level. Using the most up-to-date, publicly-available budget options and estimates from the Congressional Budget Office and the Joint Committee on Taxation, the tool provides over 100 spending and revenues options from which to choose.
This paper, "Reducing the Deficit by Increasing Individual Income Tax Rates", written by the Tax Policy Center and sponsored by the Pew Fiscal Analysis Initiative, builds on the previous work by examining whether raising just the top two or three individual income tax rates alone could put the debt on a sustainable path and what the rates would be under several different scenarios. Under certain scenarios, increasing only the top two or top three income tax rates alone to almost 100 percent would not raise enough revenue to achieve a 60 percent debt-to-GDP target in specified years. Therefore, to achieve the debt targets under these scenarios, an increase in the top income tax rates would need to be combined either with spending reductions, other revenue measures, or both.
This paper makes no recommendations and its purpose is to inform the public debate. The insights should prove useful to policy makers as they discuss income tax reform and deficit reduction over the next several years.