tax and budget issues facing the next president

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1 Tax and Budget Issues Facing the Next President Jon Forman Alfred P. Murrah Professor of Law University of Oklahoma www.law.ou.edu/faculty/forman.shtml Law and Society Association Law, Society, and Taxation Panel 01 Montreal, Canada May 29, 2008

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Tax and Budget Issues Facing the Next President. Jon Forman Alfred P. Murrah Professor of Law University of Oklahoma www.law.ou.edu/faculty/forman.shtml Law and Society Association Law, Society, and Taxation Panel 01 Montreal, Canada May 29, 2008. The Budget Outlook. Short-term - PowerPoint PPT Presentation

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Page 1: Tax and Budget Issues Facing the Next President

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Tax and Budget Issues Facing the Next President

Jon Forman

Alfred P. Murrah Professor of Law

University of Oklahoma

www.law.ou.edu/faculty/forman.shtml

Law and Society Association

Law, Society, and Taxation Panel 01

Montreal, Canada

May 29, 2008

Page 2: Tax and Budget Issues Facing the Next President

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The Budget Outlook

• Short-term– Congressional Budget Office, The Budget and

Economic Outlook: Fiscal Years 2008 to 2018 (January 23, 2008)

• Long-term– Congressional Budget Office, The Long-Term

Budget Outlook (December 2007)– David Walker, Fiscal Social Security and

Health Care Challenges (GAO-07-345CG, 2008)

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Social Security Finances 2007

Trust Fund income = $785 billion (taxes)

Trust Fund outgo = $595 billion (benefits)

Surplus = $190 billion

Social Security Administration 2008 Trustees’ Report

Page 10: Tax and Budget Issues Facing the Next President

10Social Security Administration, 2008 Trustees’ Report

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The Long-Range Forecast(Best estimate)

• In 2017, tax revenues into the trust funds forecasted to be less than benefits due that year. Interest on the reserves and the assets themselves will help pay for benefits until 2041.

• In 2041, reserves are projected to be depleted. Income is forecast to cover 78% of benefits due then.

• By 2082, assuming no change in taxes, benefits or forecasts, revenue would cover 75% of benefits due then.

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Social Security’s Financing Problem

• 2008 Trustees Report shows– Expenses will exceed payroll tax income in 2017– Trust funds will be out of money in 2041

• 75-year deficit equals 1.70% of taxable payroll– Immediate payroll tax increase of 1.70% needed to

restore actuarial balance– Alternatively, immediate 11.5% across-the-board benefit

cut– $4.3 trillion unfunded liability (over 75 years)– About 0.6% as a share of the entire economy (GDP)

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SS Unfunded Obligations(Present values as of January 1, 2008; trillions of

dollars)

Present value

As a % of future payroll

As a % of GDP

Over the infinite horizon

$13.6 3.2 1.1

Over the next 75 years

4.3 1.6 .6

Social Security Administration, 2008 Trustees’ Report, Table IV.B6.

Page 14: Tax and Budget Issues Facing the Next President

142008 Medicare Trustees’ Report

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HI Unfunded Obligations(Present values as of January 1, 2008; trillions of

dollars)

Present value

As a % of HI taxable payroll

As a % of GDP

Over the infinite horizon

$34.4 6.1 2.6

Over the next 75 years

12.4 3.4 1.6

Social Security Administration, 2008 Medicare Trustees’ Report, Table III.B10.

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Tax provision Expiration date

2009 2012 Total 2009-18

Estate & Gift 12/31/10 -1.5 -66.7 -667.8

Income Tax, EGTRRA

12/31/10 n.a. -166.6 -1,325.0

15% rate, c.g. 12/31/10 n.a. 3.1 -75.3

15% rate, div. 12/31/10 0.2 -17.3 -177.8

Increased AMT exemption

12/31/07 -73.3 -38.1 -646.2

All Various -91.0 -384.9 -3,830.4

Effects of Extending Expiring Tax Provisions(Billions of dollars)

Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2008 to 2018, Table 4-9

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Clearly Revenues Are Needed

• The revenues that are expected to result from that scheduled expiration of those tax cuts are built in to the baseline numbers that Congress and the president use to put together the annual budget.

• No agreement means all those tax provisions expire– Is that a tax increase?

• I expect Congress and the President to agree– Is that a tax cut?– How big a deficit can they live with?

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Top 10 Income Tax Expenditures, 2009(Billions of Dollars)

Health insurance exclusion $168

Mortgage interest deduction 101

401(k) plans 51

Charitable contrib. (other than health & education) 47

Accelerated depreciation 44

Capital gains (except timber, iron ore, coal) 55

Deductible nonbusiness state and local taxes other than on houses

33

Employer plans 46

Step-up of basis at death 37

Capital gains exclusion on homes 34

2009 Federal Budget, Analytical Perspectives, Chapter 19, Tax Expenditures, Table 19-3

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McCain's Proposed Tax Plan(Billions of Dollars)

Provisions and sourcesFY2009 FY2012

2009-2018

(1) Extend non-estate tax cuts 0 -179 -1,663

(2) Repeal the individual AMT -91 -140 -1,761

(3) Double the dependent exemption -38 -44 -464

(4) $5 mil. estate tax exemption, 15% rate -17 -36 -354

(5) Reduce corp. tax rate to 25%, etc. -139 -143 -1,363

(6) Permanent R&D credit -7 -12 -133

(7) Gas tax holiday -10 -10

Total of above provisions -302 -553 -5,748

Taxes as % of GDP (current law) 18.9 20.0

Taxes as % of GDP (proposed) 16.9 16.8

Urban-Brookings Tax Policy Center, T08-0071

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Options to Adjust Social Security Earnings Cap

  Calendar Year

2009 2009-18

Eliminate Earnings Cap 123.7 1,476.4

Create "Donut Hole" up to $200,000 70.4 841.4Urban-Brookings Tax Policy Center T08-0001  

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Tax Base

• Income

• Consumption

• Earnings

• Wealth

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Principles to Guide Tax Legislation

• Distribution matters– A just distribution of economic resources

• Progressivity• Taxing earnings and investments

– Intergenerational justice/ Deficits

• Behavioral consequences matter– Encourage work and savings– Marriage penalties and bonuses– Keep effective tax rates as low as possible– Growth and a stronger dollar

• Simplification

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Conclusion

• Tax laws are always temporary– No tax break or tax rate is ever safe for long

• Congress is already counting on trillions when Bush cuts expire– More needed to fix the AMT, Social Security, and

Medicare.

• President needs 60 votes in the U.S. Senate– The whole tax system will be in play– The lobbyists will be tripping over each other

• Change is always incremental

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About the Author• Jonathan Barry Forman (“Jon”) is the Alfred P. Murrah

Professor of Law at the University of Oklahoma, where he teaches courses on tax and pension law.

• Professor Forman is also Vice Chair of the Board of Trustees of the Oklahoma Public Employees Retirement System (OPERS) and the author of Making America Work (Washington, DC: Urban Institute Press, 2006), http://www.urban.org/books/makingamericawork/index.cfm.

• Prior to entering academia, Professor Forman served in all three branches of the federal government. He has a law degree from the University of Michigan, and he also has master’s degrees in economics and psychology.

• Jon can be reached at [email protected] or (405) 325-4779. His web page is www.law.ou.edu/faculty/forman.shtml.