1. The Future of Tax Expenditures and Entitlements in the Era of Hyper-Deficits Tax Colloquium Dedman School of Law Southern Methodist University March 5, 2009 by Jon Forman Alfred P. Murrah Professor of Law University of Oklahoma

2. 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

3. 2010 Budget Budget Totals, $billions20092010-2014 Receipts$2,186$14,997 Outlays$3,938$18,764 Deficit$1,752$ 3,767 Budget Totals, % GDP Receipts15.4%18.1% Outlays27.7%22.8% Deficit12.3%4.7% 3 Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 114 (table S-1).

4. Projected Budget Totals Budget Totals, $billions20102010- 2019 Receipts$2,381$35,250 Outlays$3,552$42,219 Deficit$1,171$ 6,969 Budget Totals, % GDP Receipts16.2%18.7% Outlays24.1%22.6% Deficit8.0%3.9% 4 O FFICE OF M ANAGEMENT AND THE B UDGET, A N EW E RA OF R ESPONSIBILITY : R ENEWING A MERICA ’ S P ROMISE (2009), at 114 (table S-1).

5. 5 U.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?

6. Proposed Budget Outlays Outlays, $billions20102011 Discretionary spending1,3681,286 Mandatory programs Social Security695719 Medicare453498 Medicaid290274 Other mandatory571549 Net interest164283 Disaster costs1116 Total outlays3,5523,623 6 Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 119 (table S-4).

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

8. Proposed Budget Receipts Receipts, $billions20102011 Individual income taxes1,0611,243 Corporation income taxes222302 Payroll taxes940995 Excise taxes7775 Estate and gift taxes2023 Custom duties and other receipts5867 Total receipts2,3812,713 Total outlays3,5523,623 Deficit, $billions1,171912 Deficit, % GDP8.0%5.9% 8 Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 119 (table S-4).

9. Deficits and Public Debt 9 Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 114 (table S-1). Deficit200820092010201120122019 $ billions 4591,7521,171912581712 % GDP3.2%12.3%8.0%5.9%3.5%3.1% Public Debt $ billions5,8038,3649,50910,43610,98515,370 % GDP40.8%58.7%64.6%67.3%66.7%67.2%

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

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

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

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

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

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

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

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

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

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

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

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

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

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

24. Why the Fiscal Gap?  Aging of American  Health Expenditures 24

25. 25

26. 26 Jonathan 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).

27. 27 Jonathan 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).

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

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

30. 30 2008 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.

31. 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. 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.

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

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

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

36. 36 Office 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).

37. 37 2008 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.

38. 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.

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

40. Dealing with the Recession (Various Forecasts of Real GDP) 40 Council of Economic Advisors, Economic Projections and the Budget Outlook (February 28, 2009).

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

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

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

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

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

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

47. Key Tax Cuts in 2010 Budget (billions of dollars) 20122010-2019 Index AMT, extend Bush tax cuts2973,574 Am. Recovery & Reinvestment Act263835 New individual tax cuts Extend Making Work Pay Credit63,682536,728 Expand EITC4,01332,858 Expand Child Tax Credit8,71470,469 Expand saver’s credit, auto-enroll3,01855,232 American Opportunity Credit6,77074.859 Subtotal86,197770,146 Tax cuts for business3,541149,417 47 Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 121-22 (tables S-5, S-6).

48. 48 Clearly Revenues Will Be Needed in the Future  Obama Budget  Tax Expenditures  What Is the Best Tax Base?

49. Key Tax Increases in 2010 Budget (billions of dollars) 20122010-2019 Loophole closing28,044353,467 Climate revenues78,682645,711 Upper income tax increases 36 and 39.6 rates29,604338,760 Phase out deductions15,752179,848 20% capital gains and div. rate3,656118,116 Subtotal49,012636,724 49 Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 122-23 (table S-6).

50. 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. 51 Tax Base  Income  Consumption  Earnings  Wealth

52. 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

53. Entitlement Reform  Only Two Possible Solutions Cut benefits Raise taxes  Health care Rationalization of the system 53

54. 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. 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.jforman@ou.eduwww.law.ou.edu/faculty/forman.shtml