Archive for Budget
Bigger Deficits, More Debt
Posted by: | CommentsWashington has gotten deficit religion, or at least that’s what you’d infer from recent rhetoric. From the president to congressional leaders to the newest representative elected by tea party supporters, everyone in town promises to bring the federal deficit under control. Maybe not this year—the economy is still too fragile—but soon. The president wants to freeze discretionary spending for the next five years. Republicans promise to cut this year’s spending by $100 billion—or maybe less because we’re already halfway through fiscal 2011. But actions speak louder than words and recent actions show no real signs of increased fiscal responsibility.
The Congressional Budget Office’s release last week of its semiannual budget projections showed how hard the job will be and how much worse the situation has gotten. CBO’s official estimates by law assume current law—in particular, that scheduled tax increases will actually occur. Last August’s estimate showed the federal deficit shrinking rapidly from 8.9 percent of GDP last year to 7 percent this year and less than 3 percent the last half of this decade (see red area in first graph). From there, reaching budget balance seemed feasible: trim spending, raise taxes a bit, and you’re there.
Then came December’s compromise tax bill that temporarily extended the Bush-era tax cuts and others from the 2009 stimulus bill and also added a one-year payroll tax cut. Deficits balloon for the next two years—to nearly 10 percent of GDP this year and not much lower next—and are marginally higher than the August estimates for the rest of the decade. Balancing the budget became even harder. Note that not all of the deficit increase derived from the tax bill: CBO projected a weaker economy than it had anticipated in August, which meant both lower revenues and higher spending over the next few years. Even so, however, the deficit would still hover just over 3 percent of GDP after 2015, a manageable level if the economy returns to normal growth.
But every budget maven knows that CBO’s mandated assumption of current law playing out in the future clashes with reality. On the tax side, Congress is almost certain to extend most, if not all, of the Bush-era tax cuts beyond their scheduled expiration in 2013. And many observers are betting that at least some of the tax cuts from the 2009 stimulus will live past their expiration dates too. Extend all of those and the annual deficit roughly doubles (see dark pink area in the second graph). If we also include the so-called extenders—tax provisions that Congress renews each year—the deficit swells another half percentage point (the light pink area in the graph). In 2020, the deficit would exceed $1.5 trillion.
We’ve given this lesson before but can’t repeat it often enough: continuing to extend the tax cuts from the past decade digs a budget hole too deep to climb out of by cutting spending unless we’re willing to slice away more than just waste, fraud, and abuse. And on the other side of the ledger, as Rosanne Altshuler, Katie Lim, and I showed in a 2010 paper, tax increases big enough to tame fiscal deficits by themselves are probably both politically infeasible and economically unwise.
Almost everyone agrees that trying to balance the federal budget while the economic recovery remains fragile makes little sense. But the new CBO numbers remind us once again that we can’t continue to ignore fiscal deficits and that solutions will involve both lower spending and higher taxes.
The U.S. Fiscal Imbalance and the Challenge for Tax Policy
Posted by: | CommentsThree related issues dominate budget talk in Washington these days: eliminating the deficit, cutting spending, and reforming the tax system. Achieving the first will require accepting painful doses of the second and designing the third so we raise more revenue. No easy tasks there.
The difficulty shows clearly in a graph I prepared for a recent talk for the Tax Section of the American Bar Association (slides are available here) . The graph plots spending and revenues using the latest budget estimates from the Congressional Budget Office. Balancing the budget means getting to the dark blue 45-degree line where spending matches revenues. The further northwest of the line, the bigger the deficit.
For most of the past four decades, the federal budget has been above that line. Spending has averaged just under 21 percent of gross domestic product (GDP), well above the 18 percent average for revenues. Only for a few years, from 1998-2001, have revenues fully paid the government’s bills—those four lonely dots below the diagonal line. And the last few years have found us well above the balanced budget line with deficits around 9 percent of GDP.
Those huge recent deficits result mainly from reduced tax revenues due to the economic collapse and counter-cyclical policies on both the spending and the tax side. While the CBO baseline projects a substantially better deficit picture in coming years, much of the improvement results from the optimistic assumption that Congress leaves tax law alone. Specifically that means letting all of the temporary tax cuts extended by the December compromise legislation expire and discontinuing the annual “patch” to the AMT. Under those assumptions, CBO projects that revenues will increase from 15 percent of GDP this fiscal year to 20 percent by FY2014, leaving us still well above the balanced budget line in the graph.
And that is the good news. The longer-term outlook is even more troubling as demographics and health care costs that are rising faster than the overall economy put unsustainable pressures on the level of spending.
In order to have a credible path toward fiscal sustainability, we must move beyond the bickering about whether to extend the 2001-2003 tax cuts and for whom. Even with sizeable and painful spending cuts, the Federal Government will need more revenue than the 18 percent historical average. Policymakers must look to more comprehensive reforms, including base-broadening and exploring new revenue sources.
As Milton Friedman reminded us, “to spend is to tax.” We can’t keep pretending that spending and revenue are independent policy variables. At day’s end, we have to raise enough revenue to pay for the spending we choose. That said, political and ideological differences complicate any decisions on how much to cut spending and raise taxes to achieve long-run balance. As we consider fundamental tax reform, we should seek a system that not only can raise revenue efficiently, but also is flexible enough to adapt to changing spending priorities that our democratic process will ultimately determine.
No easy task indeed.
Obama’s State of the Union: What I Heard, And What I Did Not
Posted by: | CommentsOn a purely rhetorical level, President Obama gave a terrific State of the Union address last night. He delivered the usual laundry list of promises but packaged them in a strong framework of optimism and American exceptionalism, two themes that are proven political winners.
But we are policy wonks here at the Tax Policy Center, and from a wonk point of view, the speech was disappointing. Here is what I heard tonight, and what I did not:
What he said: The President proposed a five year freeze on some domestic discretionary spending. That is to say, a freeze on what he estimated was about 12 percent of the budget.
What he didn’t say: Very much at all about what he’d do about the big entitlement programs, such as Medicare, Medicaid, and Social Security that are swallowing most federal revenues and driving the deficit. This makes Obama the anti-Willie Sutton. He is going whether the money isn’t. Such a plan is also terribly unfair. If you benefit from those programs on the block, you may face significant pain. If you benefit from Medicare, Medicaid, Social Security, or any of the trillion dollars in tax subsidies that are exempt from the freeze, you’ll be unscathed.
What he said: We need a competitive corporate tax system with low rates and fewer tax preferences that raises the same amount of money as the current corporate tax system.
What he didn’t say: How we’d get there and–except for a passing reference to ending oil subsidies–which business tax breaks he’d repeal. What role business must play in helping reduce the deficit.
What he said: We should simplify the individual tax code.
What he didn’t say: That’d he’d take the lead in such an initiative. Instead he said merely that he would be “prepared to join” a congressional effort to restructure the individual code. This moves the nation about six inches in the direction of a serious rewrite of the tax law.
What he said: Rich people should pay higher taxes
What he didn’t say: Everybody needs to pay higher taxes
What he said: He’d veto any bill that comes to him with targeted spending earmarks and he’d send a government reorganization bill to Congress and “push to get it passed”
What he didn’t say: That he’d show the same commitment and energy when it comes to tax reform or serious deficit reduction.
Finally, a brief word about House Budget Committee Chairman Paul Ryan (R-WI). Ryan made a strong, if conventional, GOP argument for smaller, less intrusive government in his rebuttal to Obama’s address to Congress.
What he said: We should cut spending, cut spending, and cut spending.
What he didn’t say: That balancing the budget is as important as merely cutting the size of government, or that unsustainably low taxes play any role in the huge deficits whose consequences he so eloquently described. Spending cuts alone won’t set us free.
So we ended the evening pretty much where it began. Both parties vow to address the budget deficit but neither will say how. Both parties disagreed without being disagreeable. But neither is budging to narrow the policy chasm that separates them.