This chapter’s illustrative options demonstrate some of the broad choices for modifying the federal tax system in order to collect the revenues needed in the committee’s four paths to fiscal sustainability. For the scenarios requiring higher revenues, increases in payroll taxation can be combined with increases in personal and corporate income taxation, which is feasible both to raise the needed revenue and approximately retain the current tax burdens. Our illustrations show that there is enough flexibility in the current personal income tax structure so that a VAT (a new, major tax) would need to be added only in the high spending and revenue scenario under this current tax structure. Tax policy that simplifies the current corporate and personal income taxes can achieve the highest required revenues without adding a VAT.
The illustrations show that well into the future, a simplified income tax structure (combined with higher payroll taxes) yields extra revenue by eliminating or modifying current tax expenditures. Enough extra revenue comes from such base broadening that a new tax like a VAT need not be added, even at the highest illustrated revenue level. In fact, by and large, under a simplified income tax structure, the marginal rates of personal income taxation would start low and decline over time and still provide the necessary revenue. In contrast, if the current tax structure (including tax expenditures) is retained, these rates would start higher and generally increase over time to meet the revenue requirements.
The debate over whether and how to raise revenues to pay for a given level of future spending offers an opportunity to consider alternatives to the current tax system that could be more efficient, simpler, and more conducive to economic growth. In any tax regime, high marginal tax rates tend to distort economic decisions, tend to lower growth, and—especially for personal and corporate income taxation—tend to reduce incentives for work and investment. But unavoidably difficult tradeoffs in values are implicit in the choice between the current tax structure and a simplified tax structure for personal income taxation.
After a transition, the committee’s illustrative policies, which use straightforward approaches to setting the rates, exemptions, and other parameters of the tax law, show somewhat less progressivity in combined federal tax burdens under the simplified tax structure than the current tax structure for each of the illustrative paths of revenue needs. And this difference in the distribution of tax burdens tends to increase over time, despite the similar starting points used.39
The simplified tax structure’s reduction in progressivity might be mitigated or avoided by adjustments or additions to its details—such as raising the capital gains tax rate relative to that on ordinary income, adjusting the