Transcript Document

Tax Policy & Budget Reform
C. Eugene Steuerle
Richard B. Fisher Institute Fellow
The Urban Institute
National Small Business Association
Small Business Congress
Washington, DC
November 28-30, 2012
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Federal Receipts by Source: 1934-2022
percentages of GDP
20
Other
Excise
Social Insurance & Retirement Receipts
10
Corporation Income
Individual Income
0
1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019
C. Eugene Steuerle and Caleb Quakenbush, The Urban Institute 2012. Data from OMB Historical Tables and the President's Proposed Budget,
FY2013. 'Other' includes estate and gift taxes, customs, and deposits of earnings by the Federal Reserve System.
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Federal Revenues as a Percentage of GDP
CBO's Baseline Projection
Alternative Fiscal Scenario
25
20
15
10
1972
1982
1992
Source: CBO Budget and Economic Outlook, January 2012
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2002
2012
2022
Federal Taxes & Spending per Household
($2012)
2012
2022
Taxes
$
21,000
$ 29,000
Total Spending
$
30,000
$ 37,000
Tax Expenditures
$
9,000
$
12,000
Interest Spending
$
2,000
$
6,000
Source: C. Quakenbush and C. E. Steuerle, the Urban Institute, 2012. Revenues, outlays, and interest based on
CBO Alternative Baseline projections; tax expenditures based on extrapolation of Treasury estimates.
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The Current Squeeze
25%
Percentage of GDP
20%
15%
Deficits if all other
spending = 0
Resources
Left for Other
Domestic Outlays
Receipts
(if tax cuts made permanent)
Spending on Social Security, Health,
Defense, International, and Interest
10%
2000
2010
2020
C. Eugene Steuerle and Stephanie Rennane, The Urban Institute 2011. Based on earlier work with Adam Carasso and Gillian Reynolds. Authors'
calculations based on data from CBO, OMB and OASDI and HI-SMI Trustees Reports.
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2030
400
The President's Priorities for Changes in Spending and Tax Subsidies
between 2012 and 2017
300
Billions, 2012$
200
293
265
250
100
169
(83)
(78)
(175)
(100)
(200)
Top 30 Tax
Expenditures
Net Interest
Medicare & Medicaid
Social Security
Other Mandatory
Discretionary
Nondefense
Defense
Source: C. E. Steuerle and C. Quakenbush, the Urban Institute 2012. Data from OMB, FY2013 Budget and Green Book. Other Mandatory includes unemployment insurance, SNAP, other income
security programs. Discretionary non-Defense includes, among others, most education funds, and energy. Does not account for interaction effects between tax expenditures.
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Relationship Between Tax &
Budget Reform
Four ways to reduce deficits
(1) Reduce direct spending
(2) Raise tax rates
(3) Spend less on tax subsidies
(4) Work more (& save more)
• Example: Raise early retirement age
– Biggest budget effect: income tax revenues
All except (1) related to taxes
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Taxes & the Budget
Reforming federal or state taxes involves dealing with
thousands of provisions:
Entire revenue side of budget, including special taxes for:
Social Security & Medicare & highways
Incentives for work & saving (which affect future revenues)
Tax rates
About 1/4 to 1/3 of all “spending” or subsidies
More housing subsidies (e.g., mortgage interest) than HUD
A larger low-income subsidy (EITC) than welfare (TANF)
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Focus on Residual
• Why attention to itemized deductions & to
those making over $250,000?
– Both parties afraid to be honest with middle
class, and
• Republicans oppose top tax rate increase
• Democrats want burden at top
– The residual:
• tax subsidies
• hidden tax rate increases
– Phase outs: new health subsidies, itemized deductions
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Reality Check
Deficits and Itemized Deductions
$billion (2015)
Deficit (current policy)
All individual tax expenditures
Repeal itemized deductions
Repeal itemized > $50,000
$ 810
$1,160
$ 180
$ 60
Calculations like these, and promised to protect middle class,
imply much must be done on the spending side of budget
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Tax Expenditures
Expenditure-like preferences in tax code
Exclusions, deductions, credits, special rates, timing shifts
Goals: social, economic, redistributive
Usually targeted at specific groups or for specific activities
Other Issues
Accounting for them doesn’t make them good or bad
Often not “neutral” or efficient
E.g., favor one form of energy production over
another
Some controversy over which to count
Most conflicts over capital income taxation
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Top 10 Individual Tax Expenditures, FY2013
(Billions)
Employer contributions to health insurance*
$ 181
Exclusions for pensions & retirement plans*
165
Mortgage interest deduction and exclusion of net imputed rental income
152
Deductibility of nonbusiness state & local taxes,
including property tax on owner-occupied homes
69
Capital gains (except agriculture, timber, iron ore, and coal)
62
Deductibility of charitable contributions (all)
46
Exclusion of Social Security benefits
38
Exclusion of interest on public purpose state & local bonds
26
Step-up basis of capital gains at death
24
Capital gains exclusion on home sales
23
Source: OMB Table 17-2.
Notes: *Excludes payroll tax effects. OMB also excludes outlay effects from its estimates. The combined revenue and outlay
estimates for FY2013 of the EITC and CTC are $55.7 billion and $40.8 billion, respectively. Extension of the payroll tax cut
through CY2012 was also not included in OMB’s standard tax expenditure estimates. Treasury estimates this to be
$31.1 billion in FY2013.
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Decline in Fiscal Democracy or Freedom:
The Modern Budget Disease
Extraordinary promises by both political parties
stretching infinitely into the future
Building permanency and growth into programs
Including automatically growing tax breaks
Reducing taxes below levels required to support
those programs
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Steuerle-Roeper Fiscal Democracy Index
Percentage of Federal Revenues Available for Noninterest, Discretionary Spending
70%
60%
50%
40%
30%
20%
10%
0%
1962
1972
1982
1992
2002
2012
-10%
Percentage of federal revenues remaining after subtracting mandatory and interest spending. Excludes spending on Troubled Assets Relief Program
(TARP). Data from OMB Historical Tables and CBO Budget and Economic Outlook 2012, Alternative Fiscal Scenario.
C. Eugene Steuerle and Caleb Quakenbush, 2012. Based on earlier work with Timothy Roeper.
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2022
Why It Really is Different This Time
Traditional problem: fiscal profligacy year after
year
Potential for succeeding periods of give-away
legislation
But long-term budgets in balance
What changed?
Built in growth in spending
Taxes and bills shifted to future generations
Both parties try to dictate future before it has arisen
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