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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
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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.
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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
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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.
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