Implement a New Minimum Tax on Adjusted Gross Income

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 0.8 5.4 5.8 6.3 7.0 7.3 7.7 8.2 8.6 9.0 25.3 66.1

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.

Under current law, individual taxpayers are subject to statutory tax rates on ordinary income (income other than capital gains and dividends) that rise from 0 percent to 39.6 percent. Higher-income taxpayers face an additional tax of 3.8 percent on investment earnings. However, people in the highest tax brackets generally may pay a smaller share of their income in income taxes than those rates might suggest, for at least two reasons. First, income realized from capital gains and dividends—which represents a substantial share of income for many people in the highest brackets—is generally subject to lower income tax rates. Second, taxpayers can claim exemptions and deductions to reduce their taxable income, and they can further lower their tax liability using credits.

This option would impose a new minimum tax equal to 30 percent of adjusted gross income, or AGI. (AGI includes income from all sources not specifically excluded by the tax code, minus certain deductions.) To reduce the liability associated with the new minimum tax, taxpayers could use just one credit equal to 28 percent of their charitable contributions. Taxpayers would pay whichever was higher: the new minimum tax or the sum of individual income taxes owed by the taxpayer and the portion of payroll taxes he or she paid as an employee. The new minimum tax would be phased in for taxpayers with AGI between $1 million and $2 million beginning in calendar year 2015; those thresholds would be adjusted, or indexed, for inflation thereafter.