Transcript Fiscal Years 2012 to 2022

Government Spending, Taxes, and Debt:
The Choices Ahead
Lecture by Robert M. Coen
Emeritus Professor of Economics
Northwestern University
November 13, 2012
Web site: faculty.wcas.northwestern.edu/~rcoen
Email: [email protected]
Outline
Federal revenue, outlays, surplus, and debt since WWII
Reasons for recent surge in deficits and debt
CBO medium-term projections of deficits and debt to 2022
CBO long-term projections of deficits and debt to 2042
Implications of the projections
Fiscal choices for the coming year
Fiscal choices for the long-run
History and prospects for tax reform
Summing up
CBO Publications Utilized
The Budget and Economic Outlook: Fiscal Years 2012 to 2022,
January 2012
The 2012 Long-Term Budget Outlook, June 2012
An Update to the Budget and Outlook: Fiscal Years 2012 to 2022,
August 2012
Definitions
Surplus = Revenue - Outlays
Negative surplus = deficit
Debt = Accumulated deficits
Federal Revenue, Outlays, and Surplus, 1947-2012
Percent of GDP
30
25
Percent of GDP
20
15
10
5
0
-5
-10
50
55
60
65
70
75
80
85
90
95
Year
Surplus
Revenue
Outlays
00
05
10
Highlights of Deficit History
Deficits increase during recessions, decline during expansions
Up to 1970s, deficits in recessions offset by surpluses in expansions
In 1970s, expansions eliminated deficit but did not produce surpluses
1980s to early 1990s, persistent deficits due to increased outlays
Deficits decline in 1990s due both reduced outlays and higher revenue
In 2001-2008, persistent deficits reemerge due to lower revenues
Beginning 2008, record deficits
Why Do Deficits Increase During Recessions?
Tax revenue declines as incomes, profits, and sales fall
Outlays for unemployment benefits rise
Outlays for food stamps rise
Outlays for Medicaid rise
Outlays for aid to state and local governments rise
Why Have Deficits Been So Large Since 2008?
Automatic stabilizers at work in most severe recession
Discretionary, temporary fiscal stimulus measures
$150b package in early 2008, mostly one-off tax rebates, faster
depreciation
Tax credit for first-time home buyers in 2008
$787b stimulus package in early 2009
Personal tax cuts 288
Education
91
Business tax cuts
51
Aid to poor
83
Healthcare
148
Infrastructure
81
Bush tax rate cuts of 2001 and 2003, set to expire in 2010, extended
through 2012
Emergency unemployment benefits enacted in for 2011-12
Payroll tax cut in 2011-12
Some non-reasons
TARP, AIG bailout, takeover of Fannie Mae-Freddie Mac, auto
bailout
Depth of Postwar Recessions
1948-49
1953-54
1957-58
Rise in
unemployment rate
4.1
3.3
3.3
Decline in
real GDP
1.7
2.6
3.1
1960-61
1969-70
1.7
2.4
1.6
0.6
1973-75
1979-82
4.2
4.9
3.2
2.9
1990-91
1.7
1.4
2001
2007-09
1.4
5.4
0.3
4.7
Federal Debt Held by the Public, 1946-2012
Percent of GDP
110
100
90
Percent
80
70
60
50
40
30
20
50
55
60
65
70
75
80
Year
85
90
95
00
05
10
CBO Baseline Projection Assumptions
Based on current law
Lower tax rates, expanded tax credits and deductions enacted in
2001, 2003, and 2009 expire at end of 2012
Provisions limiting reach of AMT expired at end of 2011
Payroll tax cut, emergency unemployment benefits expire in Feb.
2012
Automatic spending cuts of Budget Control Act of 2011 take effect
Reductions in Medicare payment rates
CBO Baseline Projection, 2013-2022
Total deficits
($ billions)
Deficit/GDP
(Percent)
Debt/GDP
(Percent)
2012
$1,128
2013-17
$1,546
2013-22
$2,258
2012
7.3
2013
4.0
2017
0.6
2022
0.9
72.8
76.1
67.9
58.5
CBO Baseline Projection, 2012-2022
Federal Revenue, Outlays, and Surplus
25
20
Percent of GDP
15
10
5
0
-5
-10
12
13
14
15
16
17
18
19
20
Year
Surplus
Revenue
Outlays
21
22
CBO Baseline Projection, 2013-2022 (shaded)
Debt Held by the Public
Percent of GDP
110
100
90
Percent
80
70
60
50
40
30
20
50
55
60
65
70
75
80
85
Year
90
95
00
05
10
15
20
CBO Baseline = “Fiscal Cliff”
(Federal revenue, outlays, and surplus in billions of dollars)
Revenue
Outlays
Surplus
%Δ Real GDP
Unemp rate (%)
2012
2013
2,435
3,603
2,913
3,554
-1,128
-641
+2.1
-0.3
8.2
9.1
CBO Alternative Scenario Assumptions
Based on current policy, not current law
Expiring tax cuts extended (except payroll tax)
AMT is indexed for inflation
Medicare payments not cut
Budget Control Act automatic spending cuts not applied
(but caps on discretionary outlays are imposed)
CBO Alternative Scenario, 2013-2022
Total deficit
($ billions)
Deficit/GDP
(Percent)
Debt/GDP
(Percent)
2012
$1,128
2013-17
$4,437
2013-22
$9,975
2012
7.3
2013
6.5
2017
4.2
2022
4.9
72.8
78.6
82.5
89.7
Comparison of CBO Projections, 2012-2022
Revenue, Outlays, and Surplus
Alternative projection
Baseline projection
25
25
20
20
15
Percent of GDP
15
10
10
5
5
0
0
-5
-5
-10
-10
12
13
14
15
16
17
18
19
20
21
22
12
13
14
15
Revenue
17
18
19
20
Year
Year
Surplus
16
Outlays
Surplus
Revenue
Outlays
21
22
CBO Projections, Baseline and Alternative, 2013-2022 (shaded)
Debt Held by the Public
Percent of GDP
110
100
90
Percent
80
70
60
50
40
30
20
50
55
60
65
70
75
80
85
Alternative
90
95
Baseline
00
05
10
15
20
Budgetary Effects of Selected Policy Alternatives Not in CBO Baseline
(Billions of dollars)
Baseline deficit
To reduce deficit:
45,000 troop reduction by 2015
Freeze discretionary at 2013 level
To increase deficit:
Maintain Medicare at current rates
Remove BCA automatic cuts
Extend income and estate tax cuts
and index AMT for inflation
Same, but rates on rich expire
Alternative projection
2013
641
2013-17
1,549
2013-22
2,258
-22
0
-324
-160
-852
-904
10
54
85
461
245
972
247
205
1,781
1,483
4,532
3,708
1,037
4,437
9,975
Population Age 65 and Older
as a Share of Population Ages 20-64
40
Percent
36
32
28
24
20
2000
2005
2010
2015
2020
Year
2025
2030
2035
CBO Long-Term Scenarios
Extended baseline scenario
Again follows current law
Revenue grows steadily after 2022 because Bush tax cuts expire
More taxpayers subject to AMT
New taxes imposed by Affordable Care Act
Interactions with demographic change and economic growth
Discretionary outlays fall to lowest levels since WWII
Extended alternative scenario
Again incorporates current policies to 2022 (Bush cuts continue)
After 2022, revenue held at 18.5% of GDP
After 2022, Medicare and HI costs not restrained
Automatic cuts of BCA not imposed
BCA Caps on discretionary kept
Discretionary outlays fall to average level of past two decades
CBO Long-Term Baseline Projection, 2012-2042
Federal Revenue, Outlays, and Surplus
28
24
Percent of GDP
20
16
12
8
4
0
-4
-8
12
14
16
18
20
22
24
26
28
30
32
34
36
Year
SURPLUS
REVENUE
OUTLAYS
38
40
42
CBO Long-Term Alternative Projection, 2012-2042
Federal Revenue, Outlays, and Surplus
40
30
Percent of GDP
20
10
0
-10
-20
-30
12
14
16
18
20
22
24
26
28
30
32
34
36
Year
SURPLUS
REVENUE
OUTLAYS
38
40
42
CBO Long-Term Projections, 2012-2042
Federal Debt Held by the Public
280
Percent of GDP
240
200
160
120
80
40
12
14
16
18
20
22
24
26
28
30
32
Year
Baseline
Alternative
34
36
38
40
42
CBO Long-Term Projections, 2013 and 2042
(Percent of GDP)
Social Security
Medicare
Medicaid
Other
Interest
2013
Base
Alt
5.1
5.1
3.7
3.8
1.8
1.8
10.4
10.8
1.5
1.5
2042
Base
Alt
6.1
6.1
6.5
7.3
3.8
3.9
6.8
9.5
2.4
11.8
Total Outlays
22.5
23.0
25.6
38.6
Revenue
18.7
16.7
24.6
18.5
Surplus
-3.8
-6.3
-1.0
-20.2
Choices for Next Year - Background
How great a priority is reducing deficits and debt?
We are still in recession
Unemployment rate = 7.8%
Capacity utilization = 78.3 (85 in mid-1970s)
Economies of Europe and Asia forecast to slow
Are deficits and debt obstacles to recovery? Two views.
YES. They undermine confidence of business and consumers
Are US deficit and debt out of line with other nations? No.
Signs of faltering confidence in US bonds or dollar? No.
Interest on debt growing large relative to tax revenue? No.
But what about downgrade of credit rating by S&P in summer 2011?
Uncertainty about future tax and spending policies
NO. They aid recovery by adding to demand for goods and services
Central Government Debt, 2010 and Change from 2006
Percent of GDP
Japan
Greece
Italy
Belgium
Portugal
UK
France
Austria
US
Ireland
Source: OECD
184
148
109
97
88
86
67
66
61
61
22
40
12
9
20
42
15
5
25
40
Netherlands
Spain
Germany
Finland
Denmark
Canada
Sweden
Norway
Switzerland
Australia
52
52
44
42
40
36
34
26
20
11
13
19
3
6
7
8
-8
14
-5
5
Yield on 10-Year Treasury Bond, 1953M4-2012M10
16
14
12
Percent
10
8
6
4
2
0
55
60
65
70
75
80
85
Year
90
95
00
05
10
Federal Interest Payments, 1947-2012
Percent of Tax Revenue (excl. Social Insurance Taxes)
40
35
Percent
30
25
20
15
10
5
50
55
60
65
70
75
80
Year
85
90
95
00
05
10
Choices for Next Year
Go over the cliff
Likely to worsen recession
Fixes medium-term imbalance without severe cuts in outlays
Temporarily extend some or all tax cuts, unemployment benefits
Adds about $250b to 2013 deficit
Creates more inertia to keep them
Administration: Extend all except for top income groups
Adds about $200b to deficit
Undertake tax reform, leave rates low or cut them further, but close
loopholes – no time for this
Pass a new stimulus package
Whatever the choice, debt limit will have to be raised around February
Choices for the Long Run
Constitutional amendment requiring balanced budget?
Budget Act Required Congress to vote on it – failed
Establish safe range of debt to GDP and stay in it?
Permanently rescind tax cuts, keep Budget Control Act caps
This is the CBO baseline
Cong. Ryan: Hold revenue at “historical norm” ~ 18.5%
Leaves little for nondefense discretionary outlays
Cut income tax rates (10 and 25% rates), close loopholes
Replace Medicare with private insurance plans
Shrink and restrict programs for poor, turn over to states
Simpson-Bowles: Raise some revenue, cut some entitlements
Keep income tax rates low, close loopholes
Raise gasoline tax
Move away from income tax, toward consumption tax
Reflections on Income Tax Reform
Reduce rates, broaden base, keep revenue unchanged or increased
Appeals: Simplification
Reduce distorting effects of tax
Reduce waste of skilled labor on tax avoidance
Last major reform in 1986
Reduced rates and number of brackets, top from 50 to 28
Eliminated deduction for interest paid, expect on mortgages
Eliminated deduction for state-local sales taxes
Eliminated favored rates for long-term capital gains
Effective Personal Income Tax Rate, 1947-2012
Ratio of Personal Income Tax Revenue to Personal Income (%)
Average (red line) = 9.7
14
12
Percent
10
8
6
4
2
0
50
55
60
65
70
75
80
Year
85
90
95
00
05
10
Reflections on Income Tax Reform
Undoing of reform since 1986
1990
1993
Top rate raised to 31%
Top rate raised to 39.6%
KG rate set at 28%
1997 Child tax credit of $500
KG rate reduced to 20%
2001 39.6% rate to fall gradually to 35%
Child credit raised to $1K
Estate tax reduced, eliminated it in 2010 (temporary)
2003 Accelerated reductions in top rates
Dividends and KG rates reduced to 15%
Numerous grants of accelerated depreciation
Numerous new tax credits – biofuels, etc.
Rate increases, more rate differentials, loopholes, complexity!
Effective Corporate Tax Rate, 1947-2012
Ratio of Corporate Tax Revenue to Corporate Profits (%)
60
Percent
50
40
30
20
10
50
55
60
65
70
75
80
Year
85
90
95
00
05
10
Reflections on Income Tax Reform
How to make up for cutting rates?
Costly loopholes:
Earned income tax credit (poor)
Untaxed employer contributions to health insurance (middle)
Mortgage interest deduction (middle)
Charitable deductions (middle and rich)
Favorable rates for KG and dividends (rich)
Accelerated depreciation, investment credits (rich)
Tax exemption of interest on municipal bonds (rich)
New proposal: Place cap on deductions/tax preferences
Closing loopholes reduces “tax expenditures”
Could hold rates constant, close loopholes, increase direct support
Taxes as Percent of GDP, 2010
Denmark
Sweden
Italy
Norway
France
Netherlands
Germany
UK
Canada
Switzerland
Japan
US
Source: OECD
48
46
43
43
43
39
36
35
31
28
28
25
Annual GDP Growth Rates, 2001-11
Sweden
Canada
Switzerland
UK
US
Norway
Netherlands
France
Germany
Denmark
Japan
Italy
Source: OECD
2.4
1.9
1.8
1.7
1.6
1.5
1.3
1.2
1.2
0.7
0.6
0.4
Taxes as Percent of GDP, 2010
46
31
28
35
25
43
39
43
36
48
28
43
Summary
Size of deficit and debt manageable in short run
Immediate concern is to sustain economic recovery
Recovery will eliminate $400-500b of deficit
Debt limit must be raised in early 2013
Recent budget imbalance not sustainable
Sustainable budget requires both more revenue and lower outlays
In CBO baseline (sustainable path)
Revenue grows to 24.6% of GDP
Yet drastic cuts are needed in discretionary outlays
In CBO alternative (excessive growth in deficits and debt)
Revenue held at 18.5% of GDP
Outlays for interest on debt swamp budget
US taxes comparatively low, room for some increase
To promote growth, move more to consumption tax
Restraining growth of outlays impeded by philosophical differences