Options for Raising Federal Revenues

CBO presents 32 options that would affect revenues. Some provisions are likely to be part of the debate in 2025 as legislators revisit expiring provisions of the Tax Cuts and Jobs Act; others would modify unrelated provisions or create new types of taxes.

Eliminate or Limit Itemized Deductions: The largest option to reduce the deficit would be to eliminate all itemized deductions, which benefit taxpayers when the value of their deductions exceeds the amount of the standard deduction. That would reduce deficits by $3.4 trillion over the 10-year period from 2025 to 2034. Subsets of such reform include eliminating just the state and local tax deduction or limiting the tax benefit of itemized deductions to a certain percentage of their value.

Impose a 5 Percent Value-Added Tax: A value-added tax (VAT) is a consumption tax imposed on the incremental increase in the value of a good or service that occurs at each stage of a supply chain until the item is sold. Applying a 5 percent VAT would decrease the deficit by between $2.2 trillion and $3.4 trillion over 10 years, depending on the size of the base to which it is applied.

Impose a New Payroll Tax: The current payroll tax is levied on the earnings of people who work for an employer and on the net earnings of people who are self-employed and used to support programs such as Social Security and Medicare. CBO estimated the amount that could be raised by a new payroll tax that would be part of general revenues of either 1 percent ($1.3 trillion raised over the 2025-2034 period) or 2 percent ($2.5 trillion raised).

Impose a Surtax on Individuals' Adjusted Gross Income: Most individual income is taxed on an amount that is reduced by certain deductions or exemptions. CBO estimated an option that would impose a surtax on a broader measure of income (adjusted gross income). Depending on the parameters of such a surtax (as defined in CBO’s option), it could garner between $1.1 trillion and $1.4 trillion in revenues over the 10-year period.

Options for Decreasing Mandatory Spending

CBO also presents 27 options that affect mandatory spending, which includes programs such as Social Security, Medicare, and Medicaid. As those three programs are the largest categories of mandatory spending in the U.S. budget, reforming them has the potential to create the most savings.

Modify Payments to Medicare Advantage Plans for Health Risk: Medicare Advantage plans cover more than half of all Medicare beneficiaries. CBO offers three options to save money in Medicare Advantage by reducing payments to the program across-the-board or by making changes to its risk-adjustment policy. Savings from those policy measures range from $124 billion to $1 trillion over 10 years.

Establish Caps on Federal Spending for Medicaid: Currently, the federal government provides the majority of Medicaid’s funding and that funding has no ceiling — larger federal payments are generated automatically if enrollment or cost per enrollee increases. CBO estimates that if caps were established for total funding provided for each state, the government could save $459 billion over the projection period; establishing caps for the cost per enrollee, as specified by CBO, could generate savings of $893 billion over 10 years.

Establish a Uniform Social Security Benefit: Social Security benefits are calculated based on an individual’s average lifetime earnings, so individuals with higher earnings receive more retirement benefits than beneficiaries with lower earnings. CBO estimates that providing every beneficiary the same amount — either 150 percent or 125 percent of the federal poverty level — could save $283 billion or $607 billion, respectively, over the 10-year period.

Options for Decreasing Discretionary Spending

CBO provides 17 options that would affect discretionary spending. As nearly half of all discretionary spending is for defense, the option reforming that budget category has the greatest potential for deficit reduction.

Reduce the Department of Defense's Annual Budget: According to CBO, addressing the Department of Defense’s annual budget could save $959 billion over the next 10 years. Reducing the number of active-component military personnel, reducing ground combat and air combat units, or relying on allies to provide their own defenses rather than using a U.S. combat force are possible methods of achieving the reform.