The U.S. Fiscal Situation (Alison Acosta Fraser)
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8/7/2019 The U.S. Fiscal Situation (Alison Acosta Fraser)
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The U.S. Fiscal Situation:Tough Choices Ahead
Alison Acosta Fraser The Heritage Foundation
May, 2006
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Spending driven by entitlements threatenslong-term fiscal stability
MedicareMedicaid
Social SecurityDefense
OtherInterest Taxes
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 20500%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Source: The Heritage Foundation's Interactive Budget Calculator using CBO and Trustees Data.
Federal Spending and Revenue as a Percentage of GDP with Optimistic Discretionary Assumptions
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Under current trends federal spendingconsumes of the economy
MedicareMedicaid
Social Security
Defense
Other
Interest Taxes
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 20500%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Defense and "Other" Spending as a Constant Share of GDP
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H istory suggests a natural level of revenueregardless of rate
Top r l I i i l I ome Tax ates and
eceipts
Individual Income Tax
ate
Income Tax
eceipts as a ercentage o f
6
6 6
Top Individual Tax
ate (
ercentage
Source :
ates from J oint ommittee on Taxation publication #J X-6- ;
eceipts from Y istorical Tables, udget o f the U nited States overnment, Table . .
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Future tax levels trend upward anddont come close to resolving the spending problem
10%
12%
14%
16%
18%
20%
22%
24%
26%
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Long - r r l nue e r en t ge of
u t E i r e nde r u rr en t Law
ush ax u t s ade e r anen t
ou r e : ! " # Long - $ e r % " udge t # u tl ook , & ecembe r 2005 , ( cena r io 2 & a t a)
is t o r ica l l eve l of t axa t ion
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Entitlements crowd out everything else andcollide with historical level of taxes
Med i ' ( r e
Med i ' ( i )
0 1 ' i ( l 0 ecu rit 2
3 i 4 t 1 ri ' ( l Leve l 1 f5
( x 6 evenues
0%
5%
10%
15%
20%
25%
1962 1972 1982 1992 2002 2012 2022 2032 20420%
5%
10%
15%
20%
25%
Sou r ' e : Spend i 7 g ( 7 ) 6 evenues fr 1 m 8 9 @ L 1 7 g -5
e rm 9 A ) ge t @ A tl 1 1 k , B ecembe r 2005 ( Scena ri 1 2 B ( t ( ) , 2006 Soc i ( l Secu rit 2 ( 7 ) Med i ' ( r e
5
r A 4 t ees 6 epo rt.
r ee Majo r E titl emen t and a x eve nu es as a e r e n t a ge o f
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Choice 1: Balanced Budget
ConsiderationsBy 2050, federal tax revenue will grow fromabout 17% of GDP today to about 30%.
With State and local taxes total taxation would be about 40% of GDP.
By comparison: Germany 36%, TheNetherlands 39%, UK 36%, Greece 36%,France 44%.
What about economic consequences?
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W hat if European-level taxes = European-level growth?
3 .3%
2 . C %
2 .3%
1 . D %
2 .2%
1 . E %
1 . D %
2 . E %
2 . D %
3 . E %
3 . D %
U. F . F G eden F r H I P e Ge r Q H I R S U-15
Real GDP Growth ve r Ten -y ea rs (1994-2004 )
F ou r P e : T S U D in Figu res : 2005 edition .
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Slower economic growth = slower income growth
$ 39,700
$ 30,400$ 29, 6 00
$ 28,500 $ 28,700
$ 30,533
$ 15,000
$ 20,000
$ 25,000
$ 30,000
$ 35,000
$4 0,000
$4 5,000
U. V . V weden F r W X Y e Ge r ` W X y EU-15 a kl W b c ` W
V c u r Y e : d c unt ry GDP e W ta f r c ` a EC D in Figu res : 2005 edition ; V tate GSP e W ta f r c ` f EA.
GDP pe r Ca pit a f r 200 4 (Using C u rr ent PPPs )
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Slower economic growth = slower job creation
5 .5%
6.6 %
10 .1%9 .9%
8 .3%
2 .0%
3 .0%
4 .0%
5 .0%
6. 0%
7 .0%
8 .0%
9 .0%
10 .0%
11 .0%
U. g . g weden F ranc e Ge r h any EU-15
Sou rce : i EC D i n Figu res : 2005 editio n .
Un emplo ym e n t Ra te f o r 200 4
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Choice 2: H old taxes constant and let deficit rise
Medic areMedic aid
Soci al Security
Defe ns e
Other
Int erestTax es
0
5
1015
20
25
30
35
40
45
50
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
0
5
1015
20
25
30
35
40
45
50
Sourc e: The H e rit age Found a tion's Int e racti v e Bud ge t C a lcul a tor usin g CB O and Trust ee s Da ta .
F ederal Sp endin g Wit h Rea listic Discr etion ary Sp endin g
And Historic al Lev el o f Tax Rev enu e
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P ast debt has not been closely linked to interest ratesF ederal Debt as a Percentage o f DP and Real Interest on a -Y ear Treasury Security
Real interest on a p q -year Treasury
Security
Debt ( r eld by Public)
-4 %
-2%
0%
2%
4 %
6 %
8%
10%
1980 1985 1990 1995 2000
0%
10%
20%
30%
40 %
5 0 %
6 0 %
Source : s conomic Report o f the President, 2 00 6 , Tables t - u 9 , t - u 3 , and t -6 3 .
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But future deficits will be unprecedentedF ederal De f icit as a Percentage o f DP
F ederal De f icit
Historical v
w erage
-5%
0%
5%
10%
15%
20%
25%
19 6 2 1972 1982 1992 2002 2012 2022 2032 20 4 2
Source : CBO x ong -Term B udget O utlook, December 2005 , ( Scenario 2 Data ) .
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Choice 3: Let entitlements preempt other spending
Me d i y a re
Me d i y a id
Soc ia l Sec u rit y
is t o ri y a l Leve l o fTa x eve nu e s
0%
5%
10%
15%
20%
25%
1962 1972 1982 1992 2002 2012 2022 2032 20420%
5%
10%
15%
20%
25%
Sou r y e : Spe nd in g and eve nu e s fr o m CBO Lon g -Te rm Bud ge t Ou tl oo k , ecembe r 2005 ( Sce na ri o 2 a t a ) , 2006 Soc ia l Sec u rit y and Me d i y a re Trus t ee s ep o rt.
Th ree Majo r En titl eme n t s and Ta x eve nu e s as a e r e n t a ge o f
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Some options for cutting spendingeven with optimistic assumptions
Medic areMedic aid
Soci al SecurityDefe ns e
OtherInt erest Tax es
0
5
10
15
20
25
30
35
40
45
50
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
0
5
10
15
20
25
30
35
40
45
50
Elimin atin g NEA, For eign Aid, NA SA, and Por k hav e littl e impact
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Ultimately Defense spending will be crowded out
Medi areMedi aid
Soc ial Sec urit yefens eOthe r
Interest
Taxe s
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 20500%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%The spe nd ing problem isn 't so lve d eve n if efens e is also elimina ted
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Choice 3: Considerations
M iddle class entitlements should not take precedenceover spending priorities - whether a conservativepriority like defense or liberal priority like education.By 2041, the budget will only have room for Social Security, M edicare, and M edicaid.
M andatory and discretionary is not an appropriatedistinction. All spending functions should compete on alevel playing field in the budget.
We should establish a long-term budget for entitlementswith budget triggers to change benefits automatically.
We should rethink principles of social insurance and focus on the truly needy.