CBO issues policy options on balancing the budget.

The Congressional Budget Office (CBO) issued its annual analysis of options for balancing the federal budget. Reducing the Deficit: Spending and Revenue Options, prepared for Senate and House budget committees, outlines tax options that could help balance the budget by 2002, including increasing existing taxes and imposing new ones, such as a value-added tax or a broad-based energy tax. It also examines policy options that would control spending in entitlement programs, such as Social Security, Medicare and Medicaid.

According to the CBO, a balanced budget in 2002 would require a deficit reduction of $493 billion over the next five years, or $448 billion in savings from policy changes and $45 billion in savings from lower service payments on the debt. Following are some of the CBO's options to help the federal government raise the necessary revenue and balance the budget by 2002.

Raising rates

Increasing all marginal tax rates by approximately 7% on individual ordinary income could raise about $215 billion from 1998 through 2002, according to the CBO. This option also would increase the top corporate marginal tax rate under the alternative minimum tax. The report also suggests that increasing the top marginal rate for corporations to 36% would raise $18.5 billion by 2002. Out of approximately 1 million corporations that have positive corporate tax liabilities each year, only about 3,500 pay income taxes at the top rate and would be affected by this option.

The report also examines the potential revenue generated from amending or repealing the indexing of individual income tax rates, taxing all corporate income at 35%, taxing capital gains held until death and raising the Medicare payroll taxes.

Limiting credits and deductions

Eliminating the deductions for mortgage interest would increase tax revenues by approximately $225 billion by 2002, according to the report. The CBO also examines simply reducing the principal eligible for deduction, capping the mortgage interest deduction and limiting the deductions for second homes. The report weighs the pros and cons of eliminating or limiting deductions for state and local taxes, which could raise as much as $225 billion by 2002. Other restrictions on credits and deductions include eliminating deductions for charitable gifts and phasing out the dependent care credit. There also are pro and con assessments on taxing employer-based health and life insurance, imposing an excise tax on non-retirement fringe benefits and lowering the limits on contributions to qualified pension and profit-sharing plans.

Entitlements

According to the report, Social Security constitutes the federal government's largest entitlement program. One CBO revenue-raising option would be to eliminate the income tax thresholds on these benefits entirely and require all beneficiaries to include 85% of their benefits in their adjusted gross incomes. The report says that many more, but not all, Social Security recipients would be required to pay income tax on their benefits but that the policy option would raise $116 billion by 2002. The report also considers potential revenue raisers such as lowering annual Medicare payments to providers and increasing the amount beneficiaries must contribute to the program.

Copies of the CBO report are available free of charge by calling the CBO publications office in Washington, D.C., at 202-226-2809.