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Choosing the Nation’s Fiscal Future
The third difference of note relates to the assumed timing. Both chapters assume revenue changes start in 2012, and Chapter 9 assumes spending changes start then, too. However, the revenue needs that drive this chapter’s data were based on preliminary modeling that delayed spending reforms. Especially for the earlier years, delaying the spending reforms tended to result in higher debt service generally and, in some instances, higher noninterest spending before spending reductions took place. Consequently, this chapter’s resulting tax policies generate slightly higher revenues than needed for the scenarios of Chapter 9. This “error” is on the side of prudence. But this small difference has little or no effect on this chapter’s comparison of the eight illustrative revenue policies—since they are all affected the same way by the projected revenue needs.
27. For each instance of a simplified tax structure, the second (or “upper”) tax bracket applies to incomes exceeding those for the first (“lower”) bracket Our illustrations vary both the personal tax rates and the thresholds for these brackets (see Appendix E).
28. The simplified tax structure is designed to start with approximately the same relative burdens as current law projected to 2012. That is done by adjusting its parameters then, specifically, the tax bracket thresholds, the standard deduction, and the child tax credit. Over time, other parameters are also adjusted to meet revenue needs, such as the tax rates for the two brackets and the rate on capital gains and qualified dividends. Although the simplified tax is designed for approximate distributional neutrality in 2012, its tax burdens might shift over time to meet revenue needs. Because of this possibility, the study compares the later projected burdens of the current and simplified taxes against each other.
29. The cap would be indexed using the chained consumer price index (CPI)—generally considered more accurate than older versions of the CPI (see Chapter 6). The chained CPI would also be used to index future payments in Option 1 for Social Security (discussed in Chapter 6).
30. In the low scenario, current tax structure rates stay fixed, by the design of this scenario.
31. Other measures of the distribution of the federal tax burden are useful as well. One is tax paid as a percentage of income, which is also the average tax rate; see Tables E-13 through E-18 in Appendix E. Also, the estimates of the future distribution of tax burdens rely heavily on projection of the income distribution, which in turn relies on CBO long-term projections. For estimation, the income breaks between the quintiles are as follows (in 2009 dollars): 20 percent, $19,429; 40 percent, $37,634; 60 percent, $65,903; and 80 percent, $112,079. That is, the top quintile comprises people with annual incomes above $112,079, and the bottom quintile comprises those with incomes below $19,429. The top 10 percent group starts at $162,348, and the top 5 percent at $227,254.
32. The payroll tax would be affected in a variety of ways under the illustrative Social Security options of Chapter 6 (summarized in Table 8-1, above). The intermediate-2 and high scenarios not only increase the Social Security payroll tax, but they also move its relative burdens in the progressive direction. Currently, the excess of annual earnings above $106,800 is exempt from Social Security payroll taxation, but both options would impose an additional tax (at a lower rate) above the current tax cap. Moreover, the high scenario would raise the current tax cap so that additional upper-level earnings would be subject to taxation at a higher rate. Although payroll tax increases first become effective in 2012, they would be phased in very gradually, so that, for a given revenue level above “low,” the distributional differences between the current and simplified tax structure almost exclusively reflect the change in income tax structure.
33. For details on effects of the payroll tax over time, see note 32.
34. These results show changes in tax distributions for future projections on the basis of commonly used assumptions about the level and distribution of income, both total