add to employers’ costs and so would not fuel inflation. However, it totally reversed the simplification advantage of removing low earners from the rolls; it actually made their tax returns much more complex than those for the average middle-class taxpayers. The administrative complexity grew as necessary safeguards were added against fraud. (And, there were concerns about possible under-withholding of tax for families whose wage incomes increase modestly during a year.) These issues have been compounded over the years as other tax credits have been made refundable.
If budget deficits prove to be as large as feared and significant revenue increases are enacted, it may be hard to raise enough revenue without some tax increases on the current large share of the household population that now does not pay income taxes—about 45 million—either because they receive a refund or owe no taxes, but instead actually receives negative income taxes.18 This would be a significant reversal of the recent policy trend of increasing the progressivity of the tax code.
Many other issues involving the economic efficiency, complexity, and ease of administration of the tax system may make it difficult to pursue any conception of fairness in taxation. The many objectives of tax policy, including fairness and revenue sufficiency, are necessarily to some degree in conflict, and the difficulty of resolving such conflicts is one of many reasons that tax reform is both technically complex and politically challenging.
Three of the committee’s four scenarios for sustainability would require raising considerable additional revenue. In two of the scenarios the levels would approach or exceed the share of GDP in some other wealthy nations (see Chapter 1 for current international comparisons). If income and payroll tax rates were simply raised while retaining the current tax structure, the adverse effect on growth would likely be more severe than if a simplified tax structure were adopted; see, e.g., Congressional Budget Office (1997), Feldstein (2006), and Hubbard (1998). Table 8-1 provides an overview of the committee’s illustrative tax options, in line with the illustrative scenarios for a sustainable fiscal future outlined in Chapter 4 and detailed in Chapter 9. Possible increases in payroll taxation for Social Security and for the hospital insurance portion of Medicare, discussed in previous chapters, are also shown. The discussion below considers possible changes to federal income taxes under the current federal structure of personal and corporate income taxation or a simplified income tax structure and with the possible addition of a VAT. The two alternative tax structures are applied to reach each of the four future revenue levels and paths required by these scenarios.