Revenues Option 46

Increase Individual Income Tax Rates

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of dollars 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2015-2019 2015-2024
Change in Revenues                        
  Raise all tax rates on ordinary income by 1 percentage point 39 59 62 65 68 72 75 79 83 87 293 689
  Raise ordinary income tax rates in the following brackets by 1 percentage point: 28 percent and over 8 12 12 13 14 15 16 17 18 19 59 144
  Raise ordinary income tax rates in the following brackets by 1 percentage point: 35 percent and over 5 7 8 8 9 10 10 11 12 12 37 91

Source: Staff of the Joint Committee on Taxation.

Note: This option would take effect in January 2015. Estimates are relative to CBO’s April 2014 baseline projections. The estimates include the effects on outlays resulting from changes in refundable tax credits.

Under current law, ordinary income earned by most individuals is taxed at the following seven statutory rates: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent. (Ordinary income is all income subject to the income tax except long-term capital gains and dividends, which are taxed under a separate rate schedule.) Some taxpayers face other statutory income tax rates. Higher-income taxpayers are subject to an additional tax of 3.8 percent on investment income, and taxpayers who are subject to the alternative minimum tax (AMT) face statutory rates of 26 percent and 28 percent. (The AMT is a parallel income tax system with fewer exemptions, deductions, credits, and rates than the regular income tax. Households must calculate the amount they owe under both the AMT and the regular income tax and pay the larger of the two amounts.)

This option includes three alternative approaches for increasing the regular statutory rates under the individual income tax. Those approaches would raise all tax rates on ordinary income (income subject to the regular rate schedule) by 1 percentage point, raise all tax rates on ordinary income in the top four brackets—28 percent and over—by 1 percentage point, and raise all tax rates on ordinary income in the top two brackets—35 percent and over—by 1 percentage point.