Illustrating the Revenue Tradeoffs —
Changing Tax Rates vs. Broadening the Tax Base
Mathematical Illustrations*
1) To eliminate F2010 deficits by increasing individual / corporate / payroll tax rates across-the-board would require +12 percentage points of tax rate increase (raising $1.4 trillion) — and would likely damage economic growth? or
2) To eliminate primary budget deficit** by F2019E by increasing top two tiers of income tax rates would require moving marginal rates to 72% / 77% from 33% / 35% — also likely to damage growth and encourage tax avoidance? or
3) Broadening tax base could require reducing ‘tax expenditures’ and subsidies, e.g., limiting deductions and subsidies for housing & healthcare?
Policy Options 1) Acombination of somewhat higher rates and a broader tax base? and/or
2) Changing taxation of individual income to encourage saving / investment rather than consumption (perhaps a value-added tax and/or carbon tax)? and/or
3) Changing taxation of corporate income to reflect global competition?
Note: *The simple tax math presented here are pure mathematical illustrations — we simply calculated how big a broad-based tax rate increase (for individual and corporate income, as well as payroll) would have to be for USA Inc. to financial break-even. These calculations are merely mechanical iflustrations and are not meant to portray realistic solutions. **Primary budget deficit is the budget deficit excluding net interest payments. www.kpcb.com
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Changing USA Inc.’s Tax System Could Help
Rebalance the Economy & Reallocate Resources
e Though there would be adjustment costs, reducing subsidies and ‘tax expenditures’ could broaden the tax base and collect more revenue, while allowing income tax rates to stay low or go lower.
e The current system favors consumption, penalizes saving; a tax based on consumption (or “value added”) could offset some of that penalty, though there are risks and drawbacks.
e Subsidies create incentives to consume more health insurance and housing — both account for 20% of GDP, vs. 11% in 19651 — and take resources from other sectors like education, technology, infrastructure.
e A worldwide corporate tax system with a lower tax rate could reduce incentives for companies to keep income offshore.
e Acarbon tax could raise some additional revenue to reduce the deficit, while encouraging sustainable economic development.
KP Source: 1) per BEA and CMS. (@E) www.kpcb.com USA Inc. | What Might a Turnaround Expert Consider? 402
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