If Republicans are serious about deficit reduction they will have to get serious not only about spending cuts but also raising revenues, and that means raising taxes. Now, some see the Republicans stated desire to maintain current income tax rates as being in competition with deficit reduction, this is not necessarily true. One can raise taxes without raising rates by broadening the taxable base (which has been significantly narrowed by a myriad of deductions, exclusions, and credits). Additionally one can tax different activities other work to raise revenues. If I were the Republicans I would propose that for every dollar of revenue raised the revenues be split evenly between deficit reduction and rate reduction. To raise revenues Republicans should propose the following:
Base Broadening Tax Modifications
1. Cap the Employer Exlusion today and set it at the average plan on the FEHB and index the cap to inflation (extend the tax treatment to those who buy their own healthcare, this will offset some of the revenues but will also be a good thing for small businesses and entrepeneurs.)
2. Cap the Mortgage Interest Deduction (currently you can deduct interest on a mortgage up to $1 million dollars, even for a home equity loan or a second home. Cap the deduction at $500,000 of interest and make home equity loans or second homes no longer applicable for the deduction). Don't index the cap.
3. Get rid of the State and Local Tax Deduction
4. Simplify all of the different tax advantaged savings programs- create one pre-tax savings vehicle and one after tax savings vehicle that everyone is eligible for- My suggestion would be a universal 401-k and a Roth IRA
Ancillary Revenues (New or Higher Existing Taxes)
1. Sin Taxes- the alcohol tax alone can raise significant revenues. On the flip side you would have fewer murders, rapes, and drunken driving deaths and injuries. Win/win.
2. Tobin Tax- Setting a modest financial transaction tax could raise a significant amount of revenue (up to $100 billion annually) while at the margins reducing market volatility
3. Gas Tax- Convert the gas tax from a fixed amount per gallon to an ad valorem basis. As the price of gas goes up so to will revenues (unless consumption of gas all of a suddent decreases much faster than the price of gas increases)
4. Carbon Tax- This is not happening but again, I think this is an area where Republicans could reorient the party in a sensible direction that is both economically efficient, distrubitionally neutral, and environmentally conscious. The tax could be very modest to begin with, though, consistently increasing over the years and plow the revenues to offset payroll taxes.
5. Bank Tax- Tax bank size. I don't know how much revenue this would raise, in an ideal world revenues would be close to nil as banks would be smaller and pose less of a systemic risk.
6. User Fees: Many agencies are funded in part or whole through user fees. These practices should be expanded.