Revenue Raisers That Aren’t Tax Increases

If we could just come up with $400 billion of revenue increases that Grover Nordquist wouldn’t classify as a tax increase, a debt limit deal could be cut within days. This is hardly the first time that Washington has raised revenue while avoiding calling it a tax “increase.”

1. Index with the chain-weighted CPI-U instead of the CPI-U – $208 billion FY12-FY21 – Following the Boskin Commission Report on CPI overstatement in December 4, 1996, the Bureau of Labor Statistics made several changes to the CPI based upon its recommendations and published a new chain weighted CPI-U that has come in lower than the CPI-U by 0.38% per year on average. Northwestern University Professor Robert Gordon recounts the history well here and explains why he believes the CPI-U remains overstated by at least 1.0%. Last March, the Congressional Budget Office estimated that switching to the chained CPI-U would raise FY12-FY21 income tax revenues by $72 billion, would lower Social Security benefits by $112 billion (p.58), and would lower Federal Civilian, Military, and Veterans pensions by $24 billion (p.56), for a total of $208 billion over the next 10 years.

2. Collect taxes already owed – $2.9 trillion FY12-FY21 – The IRS estimated that in 2001, $345 billion was owed but not paid to the federal government, of which the IRS collected $55 billion through enforcement actions. That leaves plenty of existing taxes to be collected. However, since the bulk of it is in cash payments to small businesses, the only way to collect is to force those small businesses or those paying it to report it. Many deficit reduction measures of the past 30 years have included various enforcement measures with mixed results. Increased IRS information reporting and enforcement actions against small business will be very unpopular.

3. Dividend Repatriation Holiday – +25 billion FY11-FY13, -$53 billion FY14-20 – This Joint Committee on Taxation letter to Rep. Lloyd Doggett (D-TX) on April 15, 2011 estimated a $25.5 billion revenue increase over three years as U.S. multinationals rush to repatriate dividends at a 5.25% tax rate, 85% less than the present law 35% rate. The problem is that the federal government was also estimated to lose $53.2 billion over the next seven years as corporations increased dividend payouts and relocated overseas. This is an extreme example of short-run gain and long-run loss, but that’s exactly what we did in 2004-2005, when we first adopted this for one year. President Obama is opposed because studies showed that repatriation did not create promised jobs – firms cut jobs – and most of the benefit went to dividend recipients and to stock buybacks. However, if he wants to make a lot of U.S. high tech multinationals very happy to improve his reelection chances, his stand could change.

4. Capital Gains Tax Cut – ? – Years ago, when I was still a revenue estimator at the Joint Committee on Taxation, a House Ways and Means Staff Director told me with a smile, “Pete, tell me again I can raise revenue by cutting the capital gains tax and by raising it!” Thinking he was serious, I launched into an explanation of how realizations would jump in response to a cut, although after a few years, it would lose revenue, and an increase would do the opposite. Like the dividend repatriation holiday, a capital gains cut can raise revenue in the first few years, but lose more over the long run. This is a highly controversial topic because there’s such a difference between the short run response and the long run response. Here’s what CBO said about such revenue estimates in 2002. Last March, CBO estimated raising the top rate on capital gains from 20% to 22% would raise $48.5 billion FY 12-FY21 (p.142 here), but the current House will never accept that.

5. Convert Traditional IRAs to Roth IRAs – ? – Somebody help me here. I know we’ve used this two or three times in the past to raise revenue by currently taxing transfers from a traditional IRA, where the taxpayer deducted some or all of his contributions up to a limit, to a Roth IRA, where the proceeds can be withdrawn tax-free because the contributions were made with after-tax contributions. I haven’t seen an estimate of how much this is, but if you think future tax rates are going up a lot, it would make sense to switch. Just found this CBPP analysis.

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