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5 New Revenue Sources to Fix America's Debt Crisis

The debate involving increased tax revenues is beginning to reach a crescendo in the halls of Congress and on the presidential campaign trail. Congress is spinning its wheels during this election year, as Republicans obstruct in the House, and the Senate is incapable of finding 60 votes for any substantive issue.

What has not been presented to this point is a list of realistic compromises by either political party. Proposals have been bandied about, but they are so partisan (with the exception of Bowles/Simpson) that they inspire bad feelings rather than serving as a basis for future policies that will improve our economy.

I do not speak for anybody or any group, yet I have a sense of what revenue sources could be tapped assuming that the president and the Democratic Senate agree to a class warfare truce and present serious spending reductions.

And so, I present my list of five revenue sources (Note: many of the numbers are my estimates and need far more examination):

1. Capital gains reform. Double the capital gains rate from 15% to 30% for all long-term capital gains earned by taxpayers with annual income of $1 million or more. This would principally affect the super wealthy, men like Warren Buffet and Mitt Romney, and have no impact on middle class capital gains. The most wealthy class of taxpayers reaps about 88% of the capital gains benefits in the U.S. Total capital gains in the country are about $38 billion, of which $33 billion are associated with earners over $1 million. A 100% increase in the rate would effectively yield about $17 billion to the Treasury.

2. Congress should install a federal consumption tax of 1% on all purchases except food, gasoline, and health care. This broad revenue proposal would generate significant funding for the Treasury and would be a progressive tax that affects the wealthy more than the poor. I recommend that this new tax have an automatic sunset clause after ten years unless extended by Congress. Alan Krueger, economics professor at Princeton University, estimated in a 2009 paper that a 5% consumption tax in the U.S. would yield about $500 billion in increased revenue annually. Assuming a much less draconian tax of 1% would yield about $100 billion annually.

3. Congress should consider a federal property transfer tax of 1% on all residential and commercial property sold. A friend who occupies a prominent position in the real estate industry assured me that this proposal would not materially affect home sales. Moreover, it will have a much greater dollar impact on the wealthy. Housing sales are estimated at about 4.7 million existing and new homes in 2012. The average price of a home in the country is slightly above $150,000. The resultant total sales proceeds should be over $700 billion, so a transfer tax of 1%would yield $7 billion of new revenue. Commercial sales in 2011 totaled $220 billion. Assuming the number is the same in 2012, revenues would increase by another $2 billion, or $9 billion for all real estate transfers.

4. Free health insurance provided by employers over a certain value should be taxed. This is a form of compensation that has created one of the largest benefits to taxpayers. The proposal would only apply to the most generous programs. In 2012, free health care insurance will cost the government about $184 billion, and $1.1 trillion during the next five years. It would be reasonable that at least $25 billion could be saved with by paring down the program.

5. Congress should increase the highest tax brackets by 3%, or slightly over 1 percentage point for those in the highest federal tax bracket. In 2011, the Treasury collected $924 billion of federal tax payments. Given that approximately 36.7 percent  is paid by the top 1 percent of taxpayers, a 3 percent increase would yield an additional $10 billion of revenue. 

To recapitulate, the five proposals would yield the following annual increases in government revenue: capital gains ($17 billion), federal consumption tax ($100 billion), federal property transfer tax ($9 billion), free health benefits ($25 billion), and increase highest tax brackets ($10 billion). These amounts total $161 billion annually, or over $1.6 trillion in 10 years.

Realistically, implementation of these proposals would require a herculean effort and bipartisan cooperation. But, they are doable, if we really are serious about bringing back the U.S. economically. One other qualification- the proposals are not feasible, even at substantially lower amounts, unless they are accompanied by spending cuts and more oversight of federal spending.

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