Question

The Federal Budget

1. What would you do if you had a magic budget wand, and you could make three changes to the way we raise federal revenues on an annual basis?
2. Using that same wand what three changes would you make in how we spend that money on an annual basis?

Answer 1

1. Congress could increase the tax rates that apply to personal income, corporate income, payrolls, estates, and specific products like gasoline and cigarettes. Higher rates almost always yield higher revenues, even if people and businesses do less of the taxed activity. Capital gains, which are currently taxed at a top rate of 23.8 percent, are one exception; some estimates suggest revenues may peak at rates around 30 percent but then decline at higher rates.
2. Congress could scale back or eliminate the myriad tax breaks in the existing code. Prominent personal examples include the exclusion of employer-provided health insurance, retirement saving incentives, and the exclusion of capital gains on sales of principal residences. Prominent business examples include expensing of new investments, low tax rates on overseas income, and the 20 percent deduction for qualified business income.
3. Congress could apply existing taxes more broadly. For example, it could reduce the standard deduction in the individual income tax, increase the cap on earnings subject to the Social Security payroll tax, or reduce the estate tax exemption.

A bigger economy generates more tax revenue. Policies that boost economic activity, incomes, and wealth can thus lift revenues as well. Examples include policies that increase the number of people in the labor force, the number of hours they work, and their skills. Policymakers can also modify the tax code to increase workers’ physical and intellectual capital.

Immigration reform is one way to boost economic activity. Bringing new workers into the country would expand the labor force and attract new capital; allowing unauthorized workers to enter the legal workforce would boost their productivity and taxable wages.

Other policies that might boost economic activity include investing in infrastructure, education, and innovation; reforming the rules of social programs that discourage some people from working; and restructuring the tax code to encourage domestic investment. Actual economic gains depend on policy specifics; poorly designed investments and reforms could boomerang, reducing economic activity.

The Three changes that would need to be done is increasing grants, contracts and insurance to the general public. Also increasing the Military Benefits, Health and education programmes and Food and agricultural benefits