Still Crazy After All These Years: Understanding the Budget Outlook
The United States has gone undergone major fiscal changes in recent years. Despite the tax cuts enacted early in the decade and the increased spending enacted since then, the Congressional Budget Office (CBO, 2007b) currently projects a baseline surplus of $586 billion in the unified budget over the next 10 years. Under the baseline, the deficit will decline over the next few years, and turn to a surplus by 2012 that will continue to grow through 2017. This paper evaluates recent fiscal outcomes and assesses future fiscal prospects. First, we review recent changes in the budget outlook. There has been a sizable net deterioration in the budget outlook since 2001. For example, in January 2001, the CBO baseline projected a unified budget surplus of $573 billion in 2007. CBO’s baseline now projects a deficit of $177 billion for 2007a deterioration of $750 billion or about 5.5 percent of GDP. This deterioration is due almost entirely to changes in policy. For example, more than 90 percent of the deterioration in the 2007 outlook since 2001 is attributable, according to CBO estimates, to policy changestax cuts and increases in spending. The changes in the deficit since 2001 reflect differing trends in policy choices and in economic factors. Beginning in 2001 the deficit rose due to a series of policy changes, including tax cuts, a new Medicare entitlement, and increased spending on defense and homeland security. These policy changes have increased the deficit with each passing year. At the same time, the economy and technical factors that caused revenues to decline in the early 2000s have recovered strongly in recent years. In short, the economic and technical factors that elevated the deficit from 200205 have almost entirely reversed themselves, while the effects of policy changes continue to accumulate. As a result, almost all of the net change in fiscal projections since 2001 is due to deficit-increasing changes in policy.
Do I Really Deserve Even More Of Your Money? : The Government We Deserve
The Centers for Medicare & Medicaid Services (CMS) have once again expanded the services provided under Medicare. New coverage of ultrasound monitoring of cardiac output today, new treatments for congestive heart failure yesterday, and, undoubtedly, some new cancer treatment tomorrow. New technology might even help reduce Medicare costs, though past history argues against that rosy result for most improvements. Getting more usually means paying more.
A Proposal to Finance Long-Term Care Services through Medicare with an Income Tax Surcharge
This paper proposes to expand Medicare to cover comprehensive long-term care services, including home care and custodial nursing home care. These services would be financed by a surcharge on federal income taxes. Unlike the regressive payroll tax that finances Medicares hospitalization coverage, the proposed surcharge would not increase tax burdens for low-income people. Beneficiaries would share costs through deductibles and copayments, but the program would include stop loss coverage and special protections for low-income adults. By providing long-term care insurance that protects the assets of older adults, our proposal would eliminate the savings disincentives inherent in the means-tested Medicaid system.
The Distribution of Federal Taxes
Overall, the federal tax system is highly progressive: On average, households with higher incomes pay taxes that are a larger share of their income. The 2007 average effective federal tax rate tax paid as a percentage of cash income rises from 3.4 percent for the bottom quintile or fifth of the income distribution to 25.9 percent for the top fifth.1 Within the top quintile, average rates climb from 30.4 percent for the top 1 percent to 32.8 percent for the top one-tenth of 1 percent. The individual income tax is the most progressive of the major revenue sources while payroll taxes for Social Security and Medicare are regressive.
How Much Federal Spending Is Uncontrollable?
Discussions of the federal budget often refer to mandatory spending on Social Security, Medicare, and similar programs as “uncontrollable.” In contrast with discretionary programs that Congress usually funds with annual appropriations, entitlement spending is determined by permanent laws specifying who qualifies for what benefits. This article examines changes in the percentage distribution of federal outlays since 1962. It highlights the rapid growth in mandatory spending driven by increased spending for health and retirement programs and the contrasting decline in defense spending as a share of total spending.
Tax Code and Health Insurance Coverage : Before the House Committee on the Budget
In this testimony Burman argues that there are limitations to using tax credits to expand health insurance coverage. A program of health insurance tax credits combined with reforms of the market for nongroup health insurance could significantly expand coverage, but at a very high cost. The testimony summarizes the current tax treatment of health insurance, the effects of tax subsidies on coverage and health care costs, and discusses ways that tax credits might affect health coverage. Burman offers recommendations and adds that the most cost-effective approach to expanding health insurance coverage may not be a tax subsidy at all, but an expansion of an existing public program, such as Medicaid, S-CHIP, or Medicare.
Taking Back Our Fiscal Future
The authors of this paperlongtime federal budget and policy expertswere drawn together by a deep concern about the nation’s long-term fiscal outlook. Despite diverse philosophies and political leanings, they found solid common ground and agree that unsustainable deficits in the federal budget threaten the health and vigor of the American economy and the first step toward establishing budget responsibility is to reform the budget decision process so that the major drivers of escalating deficitsSocial Security, Medicare, and Medicaidare no longer on autopilot. The paper provides specific policy recommendations and outlines the reasons action is critical.
Obama’s Loose Change
CBO says the deficit will reach $1.2 trillion this year. President-elect Obama says the red ink will continue to flow at this rate or faster “for years to come” unless policymakers “make a change in the way Washington does business.”
Obama is right, of course. And his words echo the message he used so successfully throughout the campaign. Change, he promised, that you can believe in. The problem is that the stimulus bill Obama is preparing mimics exactly the sort of cynical business Washington has been doing for decades.
It has become a drearily familiar formula: Democrats want to increase spending. Republicans want to cut taxes. So they compromise–by doing both. And arithmetic being what it is, the deficit explodes.
We may, in fact, be about to create the mirror image of what happened during the Bush Administration. In 2001, an ambitious new president rolled into Washington faced with a slowing economy, and armed with an aggressive new economic agenda and a promise to change the tone in the Capital. George Bush, of course, wanted to cut taxes. The then out-of-power Democrats wanted to spend more.
What happened? Democrats bowed to big tax cuts, and, according to CBO, revenues as a share of GDP fell from 20.9 percent in 2000 to 16.3 percent by the end of Bush’s first term. Despite his tough talk about bloated government, the President abandoned efforts to control spending. As a result, outlays ballooned from 18.4 percent of GDP to 20 percent. All the Inside the Beltway players came away winners, and the modest surplus Bush inherited turned into a deficit of 5 percent of GDP.
Oh, and by the way, only about half of that new spending was for the military. The rest went to domestic discretionary programs and entitlements such as Medicare and Medicaid.
Now the roles are reversed—the Democrats are in charge and the GOP is in the minority. And, to be sure, the economy is worse. But the story line is looking eerily familiar.
Obama suggests it will be different this time. He says that budget reform will fix all this—later. Today he appointed a White House aide to seek out waste and abuse. Sadly, we’ve heard all that before too. I await change that I can believe in.
Bad Markets and Deficits
Crumbling financial markets mean more awful news for governments already reeling from an economic slowdown and mortgage foreclosures. The only glimmer of optimism is that the sluggish revenues and rising spending that are around the corner should only be transitory. Assuming the markets and the economy rebound, these fiscal shocks will be a fading memory after a few years.
That won’t relieve short-term budget pressures. Nor will it make life any easier for a newly-elected President who will take office in the face of a deficit that CBO projected at nearly half a trillion dollars even before the markets cratered this week. But there is a big difference between the kind of one-time budget shocks caused by crashing financial markets and the trillions in long-term unfunded obligations that Washington is happily ignoring. That slow wasting of the nation’s financial underpinnings doesn’t grab headlines, but is far more dangerous.
If the current market correction ends up looking more or less like our last three big financial hiccups in 1987, 1990, and 2001-2003, capital gains tax collections will plunge for a year or two, but then bounce back.
After the market’s crash in 1987, these revenues fell 19 percent in 1988, flat-lined for a year, and then, as the stock market sagged again, dropped another 27 percent by 1991. However, through the rest of the 1990’s, capital gains taxes grew strongly as the market boomed. By 2000, Washington was collecting more than $120 billion in capital gains taxes, nearly four times what it got a decade before.
The pattern held after the tech bubble burst in 2001. Taxes on gains plunged by 59 percent through 2003, but then, with the market, they recovered. By 2005, revenues had climbed 50 percent, even though the top rate on gains had been cut to 15 percent.
Some states did not fare so well. California saw taxes on capital gains and stock options plunge by nearly $10 billion after the dot.com bust. And while those revenues have rebounded, the state has never quite gotten back on its fiscal feet.
Of course, some things are different this time, even for Washington. Thanks to the government’s unprecedented bailouts of Fannie Mae, Freddie Mac, Bear Stearns, and now AIG, Washington is on the hook for tens of billions and perhaps hundreds of billions more in spending that nobody foresaw even a couple of months ago.
It is not possible to put a dollar amount on those new obligations, which is very frightening. If the government ends up nationalizing more failing firms, the fiscal cost could become far more worrisome. But like spending for natural disasters, these bailouts are likely to be one-off expenditures. The government, thankfully, can buy AIG’s toxic assets only once.
Don’t get me wrong. This is all a very, very bad business. But unlike the future prospects for, say Medicare, this grim news has the potential to improve fairly soon.
Medicare: I’m in favor of Competition — Except When I’m Not
It wasn’t exactly So You Think You Can Dance, but watching Congress and President Bush boogie their way through the final song of the recent Medicare prom was still a hoot.
In the end, Hill Democrats stomped Bush and, despite his veto, easily passed a Medicare bill that delayed, yet again, mandated cuts in physician payments. The Dems did so while insisting they were for both true competition and fiscal responsibility. Bush, trying to claim those same virtues for himself, had unsuccessfully tried to block the bill, insisting it would hurt beneficiaries by curbing their access to managed care plans.