Fiscal Cliff Debate: Is There a Clever Way to Raise Revenue Without Increasing Taxes?

The fiscal cliff will be the talk of the table over Thanksgiving as policymakers retire for a holiday after an ostensibly productive first week of discussions. Democrats have opened up to putting entitlement cuts on the table, while Republicans are willing to evaluate new revenue streams.

The big hang-up is exactly how those revenues will be collected. The GOP is steadfast in its resolve to not raise taxes, but the sentiment is less clear on ending tax breaks. Clever workarounds to the anti-tax hike ideology include strategies like ending loopholes and limiting deductions for charitable giving, but as President Barack Obama is a fan of saying, the math might not add up.

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The individual tax rate is what matters to most Americans, but both parties agree that the bottom 98 percent of earners should not see their taxes increase. Walking away from the debate about what the appropriate tax rate should be for the top 2 percent of income earners may be difficult in such politically charged times, but many policymakers are doing just that and examining more unconventional methods of increasing revenue while not blatantly increasing taxes.

For example, ending tax breaks to fossil-fuel energy companies like Chevron (NYSE:CVX) or CONSOL Energy (NYSE:CNX) could save the government $28 billion per year. Many of the standing tax incentives are throwbacks to when the industry was less developed and needed assistance in order to operate.

The low tax rate on carried interest could be raised to a more normal level, netting an estimated $13 billion in revenue for the government. Carried interest is currently taxed at the capital gains rate of 15 percent, the lowest it has ever been. Many policymakers on the Democratic side of the aisle want to see the rate increased to a more historic level of 23.8 percent for people earning over $250,000 per year. The Buffett Rule would have the rate raised to 30 percent for those earning more than $1 million per year, 10 percent points below the record high in 1977.

Eliminating “last in, first out” accounting practices, which can be used to reduce a company’s tax rate by allowing income to be recorded at a lower rate, would result in as much as $77 billion per year in increased revenue for the government. This accounting method is banned under International Financial Reporting Standards, and is currently only used by some companies in Japan and the United States to value large inventories.

More controversial candidates for the chopping block include tax-free benefits for workers when their employers help pay for health insurance, which could save the government an estimated $164 billion in 2014, and deductions on mortgage interest, which could save $100 billion in 2014.

Curbing tax breaks could broaden the government’s income base and simplify the tax code ahead of more serious reform talks.

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