U.S. tax system in an international context, which is important to assessing how the U.S. tax regime affects the economy’s global competitiveness. It briefly discusses the important but elusive goal of achieving fairness in taxation. In the final part of the chapter, the committee analyzes two alternatives to the current tax system, considering them both as ways to fix flaws in the current system and to raise the additional revenue that would be needed under three of the committee’s four scenarios.
For the last half century, federal revenues have fluctuated mostly between 17 and 21 percent of the gross domestic product (GDP), even as tax legislation reduced or increased income tax rates, increased payroll tax rates, and made other changes. The business cycle has substantial effects on the federal budget; and the deep 2008-2009 recession, following major tax cuts early in this decade, has reduced revenues as a share of GDP below historical levels. However, as the economy recovers, revenues are expected to rise gradually back to 17 percent and then higher as the economy grows further. Figure 8-1 shows the recent history of federal revenues as well as the trend projected in the study’s baseline.
The largest amounts of federal revenue come from the individual income tax, the corporate income tax, and the payroll taxes that fund Social