the future of tax expenditures and entitlements in the era of hyper-deficits tax colloquium dedman...
TRANSCRIPT
The Future of Tax Expenditures and Entitlements in the Era of
Hyper-Deficits
Tax ColloquiumDedman School of Law
Southern Methodist UniversityMarch 5, 2009by Jon Forman
Alfred P. Murrah Professor of LawUniversity of Oklahoma
2
Overview The Budget Outlook
Short-term 2010 Federal Budget
Long-term Congressional Budget Office Government Accountability Office
Fiscal Gap Taxes and Tax Expenditures Entitlements
2010 Budget
Budget Totals, $billions 2009 2010-2014
Receipts $2,186 $14,997
Outlays $3,938 $18,764
Deficit $1,752 $ 3,767
Budget Totals, % GDP
Receipts 15.4% 18.1%
Outlays 27.7% 22.8%
Deficit 12.3% 4.7%
3Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 114 (table S-1).
Projected Budget Totals
Budget Totals, $billions 2010 2010-2019
Receipts $2,381 $35,250
Outlays $3,552 $42,219
Deficit $1,171 $ 6,969
Budget Totals, % GDP
Receipts 16.2% 18.7%
Outlays 24.1% 22.6%
Deficit 8.0% 3.9%
4OFFICE OF MANAGEMENT AND THE BUDGET, A NEW ERA OF RESPONSIBILITY: RENEWING AMERICA’S PROMISE (2009), at 114 (table S-1).
5U.S. Department of the Treasury, Financial Management Service, A Citizen’s Guide to the Financial Report of the United States Government (2008), at 4.
Where Does the Money Go?
Proposed Budget Outlays
Outlays, $billions 2010 2011
Discretionary spending 1,368 1,286
Mandatory programs
Social Security 695 719
Medicare 453 498
Medicaid 290 274
Other mandatory 571 549
Net interest 164 283
Disaster costs 11 16
Total outlays 3,552 3,623
6Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 119 (table S-4).
7U.S. Department of the Treasury, Financial Management Service, A Citizen’s Guide to the Financial Report of the United States Government (2008), at 3.
Proposed Budget Receipts
Receipts, $billions 2010 2011
Individual income taxes 1,061 1,243
Corporation income taxes 222 302
Payroll taxes 940 995
Excise taxes 77 75
Estate and gift taxes 20 23
Custom duties and other receipts 58 67
Total receipts 2,381 2,713
Total outlays 3,552 3,623
Deficit, $billions 1,171 912
Deficit, % GDP 8.0% 5.9%
8Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 119 (table S-4).
Deficits and Public Debt
9Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 114 (table S-1).
Deficit 2008 2009 2010 2011 2012 2019
$ billions 459 1,752 1,171 912 581 712
% GDP 3.2% 12.3% 8.0% 5.9% 3.5% 3.1%
Public Debt
$ billions 5,803 8,364 9,509 10,436 10,985 15,370
% GDP 40.8% 58.7% 64.6% 67.3% 66.7% 67.2%
10Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 14.
11Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2009 to 2019 (January 8, 2009), Charts at 2.
12House Budget Committee, Summary of the President’s Fiscal Year 2010 Budget (February 27, 2009), http://budget.house.gov/pres_budg.shtml.
13House Budget Committee, Summary of the President’s Fiscal Year 2010 Budget (February 27, 2009), http://budget.house.gov/pres_budg.shtml.
14U.S. Department of the Treasury, Financial Management Service, A Citizen’s Guide to the Financial Report of the United States Government (2008), at 7.
15House Budget Committee, Summary of the President’s Fiscal Year 2010 Budget (February 27, 2009), http://budget.house.gov/pres_budg.shtml.
16Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2009 to 2019 (January 8, 2009), Charts at 5.
17Majority Staff, Senate Budget Committee, Brief Analysis, President Obama’s FY 2010 Budget (February 27, 2009), http://budget.senate.gov/democratic/index.html.
18U.S. Department of the Treasury, Financial Management Service, A Citizen’s Guide to the Financial Report of the United States Government (2008), at 2.
19Congressional Budget Office, Growth in Health Care Costs (January 31, 2008), Charts at 8.
20U.S. Government Accountability Office, Saving Our Future Requires Tough Choices Today (GAO-08-465CG, January 14, 2008), at 8.
21Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2008 to 2018 (January 23, 2008), Charts at 13.
22U.S. Government Accountability Office, Saving Our Future Requires Tough Choices Today (GAO-08-465CG, January 14, 2008), at 5
23U.S. Government Accountability Office, Saving Our Future Requires Tough Choices Today (GAO-08-465CG, January 14, 2008), at 6
Why the Fiscal Gap?
Aging of American Health Expenditures
24
25
26Jonathan Barry Forman & Yung-Ping [Bing] Chen, Optimal Retirement Age, in New York University Review of Employee Benefits and Compensation—2008, Volume II, Chapter 14 (2008).
27Jonathan Barry Forman & Yung-Ping [Bing] Chen, Optimal Retirement Age, in New York University Review of Employee Benefits and Compensation—2008, Volume II, Chapter 14 (2008).
28U.S. Department of the Treasury, Financial Management Service, Financial Report of the United States Government (2008), at 122.
29Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2008 to 2018 (January 23, 2008), Charts at 12.
302008 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.
31
The Long-Range SS 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.
32
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
2008 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, Table IV.B6.
33Congressional Budget Office, Growth in Health Care Costs (January 31, 2008), Charts at 2.
34Congressional Budget Office, Growth in Health Care Costs (January 31, 2008), Charts at 6.
35Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009).
36Office of the Actuary, Centers for Medicare & Medicaid Services, U.S. Department of Health & Human Services, 2008 Actuarial Report on the Financial Outlook for Medicaid 24(2008).
372008 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.
38
Medicare 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
2008 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, Table III.B10.
39U.S. Department of the Treasury, Financial Management Service, A Citizen’s Guide to the Financial Report of the United States Government (2008), at 8.
Dealing with the Recession(Various Forecasts of Real GDP)
40Council of Economic Advisors, Economic Projections and the Budget Outlook (February 28, 2009).
41House Budget Committee, Summary of the President’s Fiscal Year 2010 Budget (February 27, 2009), http://budget.house.gov/pres_budg.shtml.
42House Budget Committee, Summary of the President’s Fiscal Year 2010 Budget (February 27, 2009), http://budget.house.gov/pres_budg.shtml.
43Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009).
44Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009).
45Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009).
46Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009).
Key Tax Cuts in 2010 Budget(billions of dollars)
2012 2010-2019
Index AMT, extend Bush tax cuts 297 3,574
Am. Recovery & Reinvestment Act 263 835
New individual tax cuts
Extend Making Work Pay Credit 63,682 536,728
Expand EITC 4,013 32,858
Expand Child Tax Credit 8,714 70,469
Expand saver’s credit, auto-enroll 3,018 55,232
American Opportunity Credit 6,770 74.859
Subtotal 86,197 770,146
Tax cuts for business 3,541 149,417
47Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 121-22 (tables S-5, S-6).
48
Clearly Revenues Will Be Needed in the FutureObama BudgetTax ExpendituresWhat Is the Best Tax Base?
Key Tax Increases in 2010 Budget(billions of dollars)
2012 2010-2019
Loophole closing 28,044 353,467
Climate revenues 78,682 645,711
Upper income tax increases
36 and 39.6 rates 29,604 338,760
Phase out deductions 15,752 179,848
20% capital gains and div. rate 3,656 118,116
Subtotal 49,012 636,724
49Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 122-23 (table S-6).
50
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
51
Tax Base
Income Consumption Earnings Wealth
52
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
Entitlement Reform
Only Two Possible Solutions Cut benefits Raise taxes
Health care Rationalization of the system
53
54
Conclusion President needs 60 votes in the U.S.
Senate The whole tax and benefit system is in play
And will be in play for years The lobbyists will be tripping over each other
Change is almost always incremental
55
About the Author Jonathan Barry Forman (“Jon”) is the Alfred P.
Murrah Professor of Law at the University of Oklahoma College of Law, 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).
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 master’s degrees in economics and psychology.
Jon can be reached at [email protected], (405) 325-4779, or www.law.ou.edu/faculty/forman.shtml.