The Future of Tax Expenditures and Entitlements in the Era of

Hyper-Deficits

Tax ColloquiumDedman School of Law

Southern Methodist UniversityMarch 5, 2009by Jon Forman

Alfred P. Murrah Professor of LawUniversity of Oklahoma

2

Overview The Budget Outlook

Short-term 2010 Federal Budget

Long-term Congressional Budget Office Government Accountability Office

Fiscal Gap Taxes and Tax Expenditures Entitlements

2010 Budget

Budget Totals, $billions 2009 2010-2014

Receipts $2,186 $14,997

Outlays $3,938 $18,764

Deficit $1,752 $ 3,767

Budget Totals, % GDP

Receipts 15.4% 18.1%

Outlays 27.7% 22.8%

Deficit 12.3% 4.7%

3Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 114 (table S-1).

Projected Budget Totals

Budget Totals, $billions 2010 2010-2019

Receipts $2,381 $35,250

Outlays $3,552 $42,219

Deficit $1,171 $ 6,969

Budget Totals, % GDP

Receipts 16.2% 18.7%

Outlays 24.1% 22.6%

Deficit 8.0% 3.9%

4OFFICE OF MANAGEMENT AND THE BUDGET, A NEW ERA OF RESPONSIBILITY: RENEWING AMERICA’S PROMISE (2009), at 114 (table S-1).

5U.S. Department of the Treasury, Financial Management Service, A Citizen’s Guide to the Financial Report of the United States Government (2008), at 4.

Where Does the Money Go?

Proposed Budget Outlays

Outlays, $billions 2010 2011

Discretionary spending 1,368 1,286

Mandatory programs

Social Security 695 719

Medicare 453 498

Medicaid 290 274

Other mandatory 571 549

Net interest 164 283

Disaster costs 11 16

Total outlays 3,552 3,623

6Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 119 (table S-4).

7U.S. Department of the Treasury, Financial Management Service, A Citizen’s Guide to the Financial Report of the United States Government (2008), at 3.

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

Total receipts 2,381 2,713

Total outlays 3,552 3,623

Deficit, $billions 1,171 912

Deficit, % GDP 8.0% 5.9%

8Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 119 (table S-4).

Deficits and Public Debt

9Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 114 (table S-1).

Deficit 2008 2009 2010 2011 2012 2019

$ billions 459 1,752 1,171 912 581 712

% GDP 3.2% 12.3% 8.0% 5.9% 3.5% 3.1%

Public Debt

$ billions 5,803 8,364 9,509 10,436 10,985 15,370

% GDP 40.8% 58.7% 64.6% 67.3% 66.7% 67.2%

10Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 14.

11Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2009 to 2019 (January 8, 2009), Charts at 2.

12House Budget Committee, Summary of the President’s Fiscal Year 2010 Budget (February 27, 2009), http://budget.house.gov/pres_budg.shtml.

13House Budget Committee, Summary of the President’s Fiscal Year 2010 Budget (February 27, 2009), http://budget.house.gov/pres_budg.shtml.

14U.S. Department of the Treasury, Financial Management Service, A Citizen’s Guide to the Financial Report of the United States Government (2008), at 7.

15House Budget Committee, Summary of the President’s Fiscal Year 2010 Budget (February 27, 2009), http://budget.house.gov/pres_budg.shtml.

16Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2009 to 2019 (January 8, 2009), Charts at 5.

17Majority Staff, Senate Budget Committee, Brief Analysis, President Obama’s FY 2010 Budget (February 27, 2009), http://budget.senate.gov/democratic/index.html.

18U.S. Department of the Treasury, Financial Management Service, A Citizen’s Guide to the Financial Report of the United States Government (2008), at 2.

19Congressional Budget Office, Growth in Health Care Costs (January 31, 2008), Charts at 8.

20U.S. Government Accountability Office, Saving Our Future Requires Tough Choices Today (GAO-08-465CG, January 14, 2008), at 8.

21Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2008 to 2018 (January 23, 2008), Charts at 13.

22U.S. Government Accountability Office, Saving Our Future Requires Tough Choices Today (GAO-08-465CG, January 14, 2008), at 5

23U.S. Government Accountability Office, Saving Our Future Requires Tough Choices Today (GAO-08-465CG, January 14, 2008), at 6

Why the Fiscal Gap?

Aging of American Health Expenditures

24

25

26Jonathan 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).

27Jonathan 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).

28U.S. Department of the Treasury, Financial Management Service, Financial Report of the United States Government (2008), at 122.

29Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2008 to 2018 (January 23, 2008), Charts at 12.

302008 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.

31

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.

32

SS Unfunded Obligations(Present values as of January 1, 2008; trillions of dollars)

Present value

As a % of future payroll

As a % of GDP

Over the infinite horizon

$13.6 3.2 1.1

Over the next 75 years

4.3 1.6 .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.

33Congressional Budget Office, Growth in Health Care Costs (January 31, 2008), Charts at 2.

34Congressional Budget Office, Growth in Health Care Costs (January 31, 2008), Charts at 6.

35Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009).

36Office 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).

372008 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.

38

Medicare Unfunded Obligations(Present values as of January 1, 2008; trillions of dollars)

Present value

As a % of HI taxable payroll

As a % of GDP

Over the infinite horizon

$34.4 6.1 2.6

Over the next 75 years

12.4 3.4 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.

39U.S. Department of the Treasury, Financial Management Service, A Citizen’s Guide to the Financial Report of the United States Government (2008), at 8.

Dealing with the Recession(Various Forecasts of Real GDP)

40Council of Economic Advisors, Economic Projections and the Budget Outlook (February 28, 2009).

41House Budget Committee, Summary of the President’s Fiscal Year 2010 Budget (February 27, 2009), http://budget.house.gov/pres_budg.shtml.

42House Budget Committee, Summary of the President’s Fiscal Year 2010 Budget (February 27, 2009), http://budget.house.gov/pres_budg.shtml.

43Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009).

44Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009).

45Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009).

46Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009).

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

New individual tax cuts

Extend Making Work Pay Credit 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

Subtotal 86,197 770,146

Tax cuts for business 3,541 149,417

47Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 121-22 (tables S-5, S-6).

48

Clearly Revenues Will Be Needed in the FutureObama BudgetTax ExpendituresWhat Is the Best Tax Base?

Key Tax Increases in 2010 Budget(billions of dollars)

2012 2010-2019

Loophole closing 28,044 353,467

Climate revenues 78,682 645,711

Upper income tax increases

36 and 39.6 rates 29,604 338,760

Phase out deductions 15,752 179,848

20% capital gains and div. rate 3,656 118,116

Subtotal 49,012 636,724

49Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 122-23 (table S-6).

50

Top 10 Income Tax Expenditures, 2009 (Billions of Dollars)

Health insurance exclusion $168

Mortgage interest deduction 101

401(k) plans 51

Charitable contrib. (other than health & education) 47

Accelerated depreciation 44

Capital gains (except timber, iron ore, coal) 55

Deductible nonbusiness state and local taxes other than on houses

33

Employer plans 46

Step-up of basis at death 37

Capital gains exclusion on homes 34

2009 Federal Budget, Analytical Perspectives, Chapter 19, Tax Expenditures, Table 19-3

51

Tax Base

Income Consumption Earnings Wealth

52

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

Entitlement Reform

Only Two Possible Solutions Cut benefits Raise taxes

Health care Rationalization of the system

53

54

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

55

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 jforman@ou.edu, (405) 325-4779, or www.law.ou.edu/faculty/forman.shtml.