How can we balance the budget in the next five years? In a series of papers on budget choices, Brookings analysts examine options for reducing domestic discretionary spending, pruning the defense budget, raising revenues, and investing additional resources in children. An overall deficit reduction plan uses the ideas developed in this series to balance the budget in the next five years. All five papers in this series, and more information about the Budgeting for National Priorities project, can be found at brookings-edu-2023.go-vip.net/budget.
Deficit reduction cannot all come on the spending side of the budget; some changes to tax policy are necessary to bring budget deficits under control. This paper discusses five broad areas of change to tax policy and recommends adjustments that will reduce the deficit in the next five years. Improving the collection of taxes that are owed by providing additional resources for enforcement, reforming the tax code, and improving voluntary compliance could bring in an additional $30 billion to $40 billion in revenue each year. Broadening the tax base by reducing tax expenditures will add between $250 billion and $300 billion a year to revenues. Implementing an environmentally motivated tax policy that achieves a reliable double dividend of both improving environmental quality and reducing the deficit could increase receipts by $30 billion to $50 billion per year. Adjusting tax rates, particularly at the top of the income distribution, through a partial rollback of the 2001 to 2004 tax cuts brings in between $60 billion and $80 billion per year. Another option, should implementing a package with all of these changes prove too difficult, is to institute a value-added tax to help rein in the deficit. A 10 percent value-added tax could raise an additional 4 to 5 percent of gross domestic product in revenue.