The fiscal 2012 budget deficit was nearly $1.1 trillion, according to the U.S. Treasury. This amount approximates the annual loss of tax revenue due to tax expenditures — special tax provisions including, exemptions, exclusions, deductions and preferential tax rates. In fact, this figure is also close to the federal income tax revenue received in 2012.
Therefore, our federal deficit would approach zero if we eliminated all tax expenditures or doubled federal income tax rates.
The Republicans tend to favor increasing tax expenditures, while Democrats tend to favor increasing tax rates. These offsetting positions have created extreme political polarity, and the results have been devastating — and getting worse. Too much time is spent on political posturing, which has created diminishing, and possibly negative, returns for too long.
It seems unlikely that the two parties would agree to an even compromise that reduces tax expenditures 50 percent while increasing tax rates 50 percent to balance the budget. The most reasonable solution is to provide an income tax deduction for the basic subsistence level of family income.
According to the Department of Health and Human Services, this amount is approximately $20,000 for a family of three. Without altering spending, this would imply a 25 percent federal tax rate for a family with a median income of $50,000, which includes payroll taxes. It would also reduce annual tax compliance expenditures by more than $300 billion.
This proposal warrants serious consideration.
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