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Tax Policy & Budget Reform
C. Eugene SteuerleRichard B. Fisher Institute Fellow
The Urban Institute
National Small Business AssociationSmall Business Congress
Washington, DCNovember 28-30, 2012
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Federal Receipts by Source: 1934-2022percentages of GDP
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.
Individual Income
Corporation Income
Social Insurance & Retirement Receipts
Excise
Other
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Federal Revenues as a Percentage of GDP
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CBO's Baseline Projection Alternative Fiscal Scenario
Source: CBO Budget and Economic Outlook, January 2012
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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
2000 2010 2020 203010%
15%
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25%
Perc
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f GD
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Resources Left for Other Domestic Outlays
Receipts(if tax cuts made permanent)
Spending on Social Security, Health, Defense, International, and Interest
Deficits if all other spending = 0
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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Top 30 Tax Expenditures Net Interest Medicare & Medicaid Social Security Other Mandatory Discretionary Nondefense Defense (200)
(100)
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(83) (78)
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The President's Priorities for Changes in Spending and Tax Subsidiesbetween 2012 and 2017
Billi
ons,
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2$
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 BudgetReforming 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 ratesAbout 1/4 to 1/3 of all “spending” or subsidies
More housing subsidies (e.g., mortgage interest) than HUDA 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 CheckDeficits and Itemized Deductions
$billion (2015)
Deficit (current policy) $ 810 All individual tax expenditures $1,160Repeal itemized deductions $ 180Repeal itemized > $50,000 $ 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 codeExclusions, deductions, credits, special rates, timing shiftsGoals: social, economic, redistributive
Usually targeted at specific groups or for specific activities
Other IssuesAccounting for them doesn’t make them good or badOften 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 programsIncluding automatically growing tax breaks
Reducing taxes below levels required to support those programs
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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.
Steuerle-Roeper Fiscal Democracy IndexPercentage of Federal Revenues Available for Noninterest, Discretionary Spending
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Why It Really is Different This Time
Traditional problem: fiscal profligacy year after year
Potential for succeeding periods of give-away legislationBut long-term budgets in balanceWhat changed?
Built in growth in spendingTaxes and bills shifted to future generations
Both parties try to dictate future before it has arisen