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The Future of Tax Expenditures and Entitlements in the Era of Hyper-Deficits Tax Colloquium Dedman School of Law Southern Methodist University March 5, 2009 by Jon Forman Alfred P. Murrah Professor of Law University of Oklahoma Overview The Budget Outlook Short-term 2010 Federal Budget Long-term Congressional Budget Office Government Accountability Office Fiscal Gap Taxes and Tax Expenditures Entitlements 2 2010 Budget Budget Totals, $billions Receipts Outlays Deficit Budget Totals, % GDP Receipts Outlays Deficit 2009 2010-2014 $2,186 $14,997 $3,938 $18,764 $1,752 $ 3,767 15.4% 27.7% 18.1% 22.8% 12.3% 4.7% Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 114 (table S-1). 3 Projected Budget Totals Budget Totals, $billions Receipts Outlays $2,381 $3,552 Deficit Budget Totals, % GDP Receipts Outlays Deficit $1,171 20102019 $35,250 $42,219 $ 6,969 16.2% 24.1% 18.7% 22.6% 8.0% 3.9% OFFICE OF MANAGEMENT AND THE BUDGET, A NEW ERA PROMISE (2009), at 114 (table S-1). OF 2010 RESPONSIBILITY: RENEWING AMERICA’S 4 Where Does the Money Go? U.S. Department of the Treasury, Financial Management Service, A Citizen’s Guide to the Financial Report of the United States Government (2008), at 4. 5 Proposed Budget Outlays Outlays, $billions 2010 2011 Discretionary spending 1,368 1,286 Social Security 695 719 Medicare 453 498 Medicaid 290 274 Other mandatory 571 549 164 283 11 16 3,552 3,623 Mandatory programs Net interest Disaster costs Total outlays Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 119 (table S-4). 6 U.S. Department of the Treasury, Financial Management Service, A Citizen’s Guide to the Financial Report of the United States Government (2008), at 3. 7 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 2,381 2,713 3,552 3,623 Deficit, $billions 1,171 912 Deficit, % GDP 8.0% 5.9% Total receipts Total outlays Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 119 (table S-4). 8 Deficits and Public Debt Deficit 2008 2009 2010 $ billions 459 1,752 1,171 % GDP 2011 2012 2019 912 581 712 5.9% 3.2% 12.3% 8.0% 3.5% 3.1% 5,803 9,509 10,436 10,985 15,370 Public Debt $ billions % GDP 8,364 40.8% 58.7% 64.6% 67.3% 66.7% Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 114 (table S-1). 67.2% 9 Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 14. 10 Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2009 to 2019 (January 8, 2009), Charts at 2. 11 House Budget Committee, Summary of the President’s Fiscal Year 2010 Budget (February 27, 2009), http://budget.house.gov/pres_budg.shtml. 12 House Budget Committee, Summary of the President’s Fiscal Year 2010 Budget (February 27, 2009), http://budget.house.gov/pres_budg.shtml. 13 U.S. Department of the Treasury, Financial Management Service, A Citizen’s Guide to the Financial Report of the United States Government (2008), at 7. 14 House Budget Committee, Summary of the President’s Fiscal Year 2010 Budget (February 27, 2009), http://budget.house.gov/pres_budg.shtml. 15 Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2009 to 2019 (January 8, 2009), Charts at 5. 16 Majority Staff, Senate Budget Committee, Brief Analysis, President Obama’s FY 2010 Budget (February 27, 2009), http://budget.senate.gov/democratic/index.html. 17 U.S. Department of the Treasury, Financial Management Service, A Citizen’s Guide to the Financial Report of the United States Government (2008), at 2. 18 Congressional Budget Office, Growth in Health Care Costs (January 31, 2008), Charts at 8. 19 U.S. Government Accountability Office, Saving Our Future Requires Tough Choices Today (GAO-08-465CG, January 14, 2008), at 8. 20 Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2008 to 2018 (January 23, 2008), Charts at 13. 21 U.S. Government Accountability Office, Saving Our Future Requires Tough Choices Today (GAO-08-465CG, January 14, 2008), at 5 22 U.S. Government Accountability Office, Saving Our Future Requires Tough Choices Today (GAO-08-465CG, January 14, 2008), at 6 23 Why the Fiscal Gap? Aging of American Health Expenditures 24 Remaining Life Expectancies for Males at Various Ages, from 1900 to 2100 Remaining Life Expectancy 100 80 At Birth 60 At Age 30 At Age 60 40 At Age 65 At age 70 20 At Age 100 0 1900 1940 1980 2020 Year of Birth 2060 2100 Jonathan 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). 25 Age Life Expectancies at Birth versus Social Security Full Retirement Age 90 85 80 75 70 65 60 55 50 45 40 1900 Life expectancy at birth, females Life expectancy at birth, males 1940 1980 Year of birth 2020 2060 Jonathan 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). 26 Labor Force Participation of Men Age 55 and Older, 1950-2007 80% Participation rate 70% Men age 55 and over Men age 65 and over 60% 50% 40% 30% 20% 10% 0% 1950 1955 1960 1965 1970 1975 Year 1980 1985 1990 1995 2000 2005 Jonathan 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). 27 U.S. Department of the Treasury, Financial Management Service, Financial Report of the United States Government (2008), at 122. 28 Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2008 to 2018 (January 23, 2008), Charts at 12. 29 2008 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds. 30 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. 31 SS Unfunded Obligations (Present values as of January 1, 2008; trillions of dollars) Present value Over the infinite horizon Over the next 75 years $13.6 4.3 As a % of future payroll 3.2 1.6 As a % of GDP 1.1 .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. 32 Congressional Budget Office, Growth in Health Care Costs (January 31, 2008), Charts at 2. 33 Congressional Budget Office, Growth in Health Care Costs (January 31, 2008), Charts at 6. 34 Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009). 35 Office 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). 36 2008 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. 37 Medicare Unfunded Obligations (Present values as of January 1, 2008; trillions of dollars) Present value Over the infinite horizon Over the next 75 years $34.4 12.4 As a % of HI taxable payroll 6.1 3.4 As a % of GDP 2.6 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. 38 U.S. Department of the Treasury, Financial Management Service, A Citizen’s Guide to the Financial Report of the United States Government (2008), at 8. 39 Dealing with the Recession (Various Forecasts of Real GDP) Council of Economic Advisors, Economic Projections and the Budget Outlook (February 28, 2009). 40 House Budget Committee, Summary of the President’s Fiscal Year 2010 Budget (February 27, 2009), http://budget.house.gov/pres_budg.shtml. 41 House Budget Committee, Summary of the President’s Fiscal Year 2010 Budget (February 27, 2009), http://budget.house.gov/pres_budg.shtml. 42 Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009). 43 Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009). 44 Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009). 45 Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009). 46 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 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 86,197 770,146 3,541 149,417 New individual tax cuts Extend Making Work Pay Credit Subtotal Tax cuts for business Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 121-22 (tables S-5, S-6). 47 Clearly Revenues Will Be Needed in the Future Obama Budget Tax Expenditures What Is the Best Tax Base? 48 Key Tax Increases in 2010 Budget (billions of dollars) 2012 2010-2019 Loophole closing 28,044 353,467 Climate revenues 78,682 645,711 36 and 39.6 rates 29,604 338,760 Phase out deductions 15,752 179,848 3,656 118,116 49,012 636,724 Upper income tax increases 20% capital gains and div. rate Subtotal Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 122-23 (table S-6). 49 Top 10 Income Tax Expenditures, 2009 (Billions of Dollars) Health insurance exclusion Mortgage interest deduction 401(k) plans $168 101 51 Charitable contrib. (other than health & education) Accelerated depreciation Capital gains (except timber, iron ore, coal) Deductible nonbusiness state and local taxes other than on houses Employer plans Step-up of basis at death 47 44 55 33 Capital gains exclusion on homes 34 2009 Federal Budget, Analytical Perspectives, Chapter 19, Tax Expenditures, Table 19-3 46 37 50 Tax Base Income Consumption Earnings Wealth 51 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 52 Entitlement Reform Only Two Possible Solutions Cut benefits Raise taxes Health care Rationalization of the system 53 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 54 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) 3254779, or www.law.ou.edu/faculty/forman.shtml. 55