Robert RickettsFrank M. Burke Chair in Taxation

October 2010

Trend Lines: Revenues & Expenditures 2006-2010

(first 11 months each year)

Revenues Expenditures Deficit

Gross Change (%) Gross Change (%) Gross Change (%)

2006 2,123,378 2,427,741 304,366

2007 2,282,320 7.49% 2,556,710 5.31% 274,393 -9.85%

2008 2,251,413 -1.35% 2,751,946 7.64% 500,530 82.41%

2009 1,885,483 -16.25% 3,255,999 18.32% 1,370,518 173.81%

2010 1,916,555 1.65% 3,176,150 -2.45% 1,259,597 -8.09%

Source: Monthly Treasury Statements (www.fms.treas.gov/mts/mts.pdf)

Explaining the Deficit:Change in U.S. Federal Tax Revenues

2008-2009

2008 2009 Change Percent

Individual Income Taxes $1,145,700 $915,300 ($230,400) -20.11%

Corporate Income Taxes 304,430 138,200 (166,230) -54.6%

Social Security Taxes 900,200 890,900 (9,300) -1.03%

Unemployment Insurance 39,535 37,431 (2,104) -5.32%

Estate & Gift Taxes 28,800 23,500 (5,300) -18.4%

Other (excise, customs, etc) 105,335 99,269 (6,066) -5.76%

Total $2,524,000 $2,104,600 ($419,400) -16.62%

Explaining the Deficit 2008-2009 Budget Reconciliation

2008 2009 ChangePercent Change

Tax Revenues (previous slide) 2,524,000 2,104,600 (419,400) -16.62%

Expenditures:

HHS (Medicare, Medicaid) 653,924 729,621 75,697 +11.58%

Dep’t of the Treasury (TARP) 534,707 708,546 174,839 +32.51%

Social Security Administration 605,668 666,314 60,646 +10.01%

Dep’t of Defense (Iraq, Afghanistan) 542,656 576,443 33,787 +6.23%

Dep’t of Labor (unemployment) 53,313 123,474 70,161 +131.6%

Dep’t of Agriculture (food stamps) 84,515 105,276 20,761 +24.56%

HUD (FHA losses) 45,675 57,983 12,308 +26.95%

Homeland Security (disaster relief, border patrol) 36,515 47,344 10,829 +29.66%

Defense Civil Programs (Military Ret.) 41,909 52,374 10,465 +24.97%

All other 383,718 450,825 67,107 +17.49%

Deficit (458,600) (1,413,600) (955,000) 208.24%

Present Value of “Social Insurance” Liabilities Projected Over Next 75 Years “Social Insurance” programs account for just over

40% of the budget

As of the end of fiscal year 2009, the estimated net present value liability associated with these programs was $45 trillion:

Medicare – $38 trillion** (before HCR) SS – $7.6 trillion

2009 GDP = $14.265 trillion

Source: Fiscal Year 2009 Financial Report of the United States, p. xiii (http://www.gao.gov/financial/fy2009/09frusg.pdf)

Present Value of “Social Insurance” Liabilities (cont)

PV of Projected GDP over next 75 years = $776 T

Net PV excess “Social Insurance” expenditures –5.8% projected PV GDP

Social Security deficit – 1% GDP over next 75 years

Medicare deficit – 4.8% GDP over next 75 years

Medicare shortfall is almost 500% of SS shortfall in relative terms (as of FYE 2009)

OverviewSocial Security as of FYE 2009

Total Beneficiaries – 53 million

Retirees – 36 million

Survivors – 6 million

Disabled workers – 10 million

Employees paying into system – 136 million

Source: 2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (www.ssa.gov/OACT/TR/2010/index.html)

Overview (cont)Total Revenues – $807 billion

Taxes (12.4% taxable payroll) – $689 billion

Interest ($2.5 trillion in Treasury bonds) – $118 billion

Total Expenditures – $686 billionSource: 2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability

Insurance Trust Funds (www.ssa.gov/OACT/TR/2010/index.html) . Note that figures do not tie to CBO’s historical figures (www.cbo.gov/budget/budget.cfm).

Social Security Surpluses vs. Operating Deficit

1990-2009

It has not always been this way …

The cumulative Social Security surplus for the period 1990—2009 was $2.5 trillion

This represents around 23% of the total government debt ($11 Trillion) as of the end of fiscal year 2009

Annual Cost of SS Benefits2009 – benefits paid = 4.8% of GDP

2009 – SS tax revenues = 5.76% of GDP

2035 – projected benefits = 6.1% of GDP

After 2035, costs projected to decline to 5.9 % of GDP

“Fixing” Social Security Cost Factors:

Retirement age Life expectancy Choice of inflation index (wage inflation is about 30% less

than CPI)

Revenue Factors: Tax rate Tax base

Earnings ceiling S corp pass-through income “Carried interest” (e.g., hedge fund manager salaries) Immigration

Taxation of benefits to recipients

Example: Lifting the Earnings Cap?

In 2007 (most recent data available), eliminating the cap on wages subject to FICA taxes would have increased tax revenues by $312 billion (enough to eliminate the 2008 total budget deficit)

Eliminating FICA on the first 20,000 of wages that year would have cost $69 billion in lost revenue

Thus, we could have increased tax revenues in 2007 by about $243 billion by eliminating FICA on the first $20,000 of wages, and eliminating the earnings cap on wages subject to FICA

SSA ProjectionsAnnual cost rate:

2010 – 13.09% of “taxable payroll”

2035 – 17.43% of “taxable payroll”

Current tax rate (combined) – 15.3% of “taxable payroll”

SSA ProjectionsFor 75-year projection period, the shortfall in SS could

be eliminated by: Immediately reducing benefits by 12%

Increasing combined tax rate immediately by 1.84%

This would absorb about 5.9% of projected real wage growth over next 30 years

Note that rate increases over the past 30 years absorbed 6.8% of real wage growth

SS Trustees Report for 2010 projects average realwage in 30 years will be 48.7% higher than today

Overview 2010 Medicare Trustees Report

Outlook “substantially” improved as a result of HCR:HI Trust Fund solvency extended 12 years

to 2029

75-year HI shortfall reduced to 0.66% of “taxable payroll” vs. 3.88% in 2009

Note that taxable payroll is different for Medicare than for Social Security

How HCR Reduces Projected Medicare Shortfall

Medicare reimbursement inflation adjustment:

Reduced to rate of “total economy multifactor productivity growth”

Does not apply to physicians’ services or drugs

Rationale: future growth in healthcare costs will not be allowed to exceed productivity growth in broader economy

Medicare Trustee Projections Hospital Insurance Trust Fund (HI) Deficit

0.66% of “taxable payroll”

Note that there is no earnings ceiling on Medicare payroll tax

Beginning in 2029, dedicated revenues projected to be equal to 85% of HI costs and will decline slowly from there

Over 75 years, HI shortfall projected to be equal to:

23% of Medicare payroll taxes

16% of HI program costs

Medicare Trustee ProjectionsMedicare, Part B (SMI) – pays doctors’ bills

and other outpatient expenses

Medicare, Part D – pays for prescription drugs Combined cost = 1.9% of GDP in 2009

Projected cost 2040: 3.5% of GDP

We have more work to do with regard to controlling prices for prescription drugs

Immediate Issue: Should we Extend the 2001-2003 Tax Cuts?

CBO Budget Projections if Tax Cuts Expire and HCR Unchanged

Extending the 2001-2003 Tax Cuts

CBO Projections Assuming Tax Cuts will be Extended and HCR Reforms will not be Fully Implemented

Gouging the Rich?Comparing effective total (state & federal) tax rates:

Source IRS 2008 individual income tax returns

All itemizers

Itemized deductions claimed for sales, property, state income and other taxes

Total federal income tax paid, including AMT, after allowable tax credits

FICA taxes paid conservatively estimated based on total salaries reported, assuming two workers with equal pay.

Effective Total Tax RatesLocal, State & Federal (incl. FICA)

U.S. Itemizers

Adjusted Gross Income

Pct ofItemizers

Share of AGI

Effective Total Tax

Rate

Bottom90%

Zero to $25,000

$25,000 to $50,000$50,000 to $75,000$75,000 to $100,000$100,000 to $200,000

Cumulative Total

9.23%20.15%20.55%16.70%24.71%91.34%

1.19%6.46%10.76%12.20%27.96%58.51%

49.45%34.43%32.56%32.11%33.52%

34.86%

$200,000 and above

$200,000 to $500,000$500,000 to $1,000,000

Cumulative Total

6.88%1.14%

8.02%

16.54%6.54%

23.08%

35.44%31.75%

34.91%

Top 1%

$1,000,000 to $1,500,000$1,500,000 to $2,000,000$2,000,000 to $5,000,000$5,000,000 to $10,000,000$10,000,000 or more

Cumulative Total

0.28%0.12%0.17%0.04%0.03%0.64%

2.85%1.72%4.37%2.50%6.90%18.41%

29.62%28.55%27.38%25.71%22.95%

28.26%