Any credible and effective federal deficit-reduction plan will require adequate revenue increases as well as spending cuts. This Bloomberg Government Study identifies potential
revenue increases and examines their probable impact on companies.
The key findings of this study, the final in a four-part series, are:
- The most likely source of additional revenue in a deficit-reduction plan will be
changes to personal income taxes: raising marginal rates, increasing the rate
paid on dividends and capital gains, limiting deductions, or some combination
of those three.
- Increased revenue from personal income taxes probably won’t produce a
significant impact on most businesses, including large, publicly traded “C”
corporations and startups. Yet certain types of businesses could feel some pain:
- New business formation could suffer from an increase in the capital
- An overall cap, or reduction of deductions, would reduce incentives for
home purchases and donations to charitable organizations while
increasing pressure on state and local governments to reduce
- Residential construction companies and related industries (lumber,
cement and appliances), companies selling to not-for-profit
organizations (hospitals and universities), and firms doing business
with state and local governments would be adversely affected.
- Residents in states with relatively high state and local taxes as well as
housing prices would be disproportionately affected; firms catering to
upper-income markets could see some negative impacts.
- Changes to corporate taxes may play some part in an initial deficit-reduction
deal, although corporate tax code overhaul is more likely to be tackled later
during the plan’s 10-year scoring window from 2013 to 2022. This change
would involve reducing marginal corporate rates and eliminating certain tax
preferences. This study finds that:
- Reducing corporate marginal rates is expensive. For every 1 percent
reduction in the rate, $125 billion in revenue must be raised over
10 years for the corporate tax overhaul plan to be revenue neutral.
- Elimination of the largest tax preferences will most adversely affect the
- Larger tax increases in the long run are likely necessary to stabilize the country’s finances. Elected officials may turn to another kind of tax, such as one on carbon dioxide, to get the job done. This move would raise $1 trillion over 10 years if carbon dioxide were taxed at $20 per ton of carbon dioxide emitted.
To access this complete study, as well as the next two installments, request a free trial of the Bloomberg Government information service.
Robert Litan is Bloomberg Government’s director of research. He previously worked at the Kauffman Foundation as vice president for research and policy and at the Brookings Institution as a senior fellow. During the Clinton administration, he served as deputy assistant attorney general at the Department of Justice and then as associate director of the Office of Management and Budget. Litan received a B.S. in economics from the University of Pennsylvania, a J.D. from Yale Law School, and a master’s and Ph.D. in economics from Yale University.
Tony Costello is Bloomberg Government’s lead analyst. He spent four years as a buyside investment analyst covering energy at Osprey Partners and Mooring Financial. In these positions, Costello evaluated energy-related securities and made recommendations to portfolio managers. His undergraduate degree is in finance from George Washington University and he holds an MBA from The Darden School at the University of Virginia.
Chris Payne is a senior economic analyst with Bloomberg Government. After getting his Ph.D. at the London School of Economics, he served as a research fellow at Duke University. Payne worked as a CPA at PricewaterhouseCoopers and was a vice president at JPMorgan Securities covering Asian emerging markets. He also has a master’s from the London School of Economics and a B.A. from Cambridge University.
Patrick Driessen is a taxation policy analyst for Bloomberg Government, which he joined after a career as an economist and revenue estimator at the Joint Committee on Taxation and the Treasury Department. Driessen received a Ph.D. from the University of Michigan, and specializes in international and accounting tax issues as well as the tax legislative process.