July 27, 2003

The Long-Term Budget Outlook

Brookings's Bill Gale talks turkey about the long-term fiscal-policy mess George W. Bush and company have gotten us into:

The Brookings Institution: ...My testimony focuses on five main points.

First, the conventional wisdom is accurate: The United States faces substantial projected fiscal deficits in the coming decades. A big part of the reason why is that increasing life spans, the retirement of the baby boom generation, and changes in health care technology will generate persistent increases in spending on social security, medicare and medicaid that far outstrip the rate of growth of the economy.

Second, there is another big part of the problem: namely, the sunsets that are in the tax code. If all of those sunsets were removed, revenue would fall by 2.4 percent of GDP on a permanent basis. If, in addition, the alternative minimum tax is reduced so that only 3 percent of taxpayers stayed on it--about the current level--revenues would fall by about 2.7 percent of GDP.

These prospective revenue losses are huge. They are more than three times as large as the 75-year actuarial deficit in social security, expressed as a share of GDP. They exceed the 75-year actuarial deficit in the Social Security and Medicare Trust Funds. They are larger than the permanent deficit in Social Security.

These facts imply that the aggressive tax-cutting agenda that the Administration has pursued the last few years deserves equal billing with Social Security and Medicare as "the real fiscal danger." They also imply that the decisions you make about extending the tax cuts, about removing the sunsets, have long-term fiscal implications that are greater than those that arise from fixing the entire social security problem.

Third, there is no hidden pot of gold waiting for us in future revenue from tax-deferred retirement accounts. Recent press reports have grossly overstated the impact of research undertaken by Stanford University Professor Michael Boskin. The press reports and some aspects of Boskin's paper suggest that future revenues from tax-deferred saving plans are (i) omitted in fiscal gap calculations, (ii) large enough to eliminate most or all of the fiscal gap, and (iii) likely to raise $12 trillion in revenues through 2040.

These suggestions are flawed. In fact, the underlying fiscal gap calculations already contain almost all of the projected revenues. As a result, adjusting the conventional estimates for the difference between Boskin's projections and the projections that are built in to the fiscal gap estimates has trivial effects on the estimated long-term fiscal gap and on estimated future budget deficits. Nor are we ever likely to see $12 trillion in net revenues from tax-deferred retirement accounts. After adjusting Boskin's estimates for reasonable parameter values, an error in the computer code, and proper treatment of interest payments, the revenue effect will be either close to zero or possibly negative.

Fourth, the economic effects of persistent budget deficits are gradual but they are debilitating nonetheless. The real problem created by budget deficits is that they reduce national saving, which in turn reduces the assets owned by Americans and hence reduces future national income. These effects can be sizable, especially in the long-term. Conventional estimates, based on models developed by the CEA Chair Gregory Mankiw, indicate that the decline in the fiscal outlook since January 2001 has reduced GDP by at least 1 percent in 2012 and national income per household by $2,300 in 2012. These effects will persist over time. To put it differently, controlling the deficit is a pro-growth policy.

Much of the public debate focuses on how deficits affect interest rates. The impact on interest rates can be an important channel through which deficits matter. But the debate about interest rates is--or should be--considered a sideshow. Persistent deficits reduce national saving and therefore hurt the economy even if they do not affect interest rates. regardless of whether interest rates rise. Nor does it matter if the deficit is completely financed by capital inflows. For example, even if capital flows in to offset the deficit, that only implies that domestic production does not fall. But since Americans would own fewer claims on that production, since they borrowed from abroad, their income would still fall.

Fifth, the fiscal problems the country faces are unlike any other the country has faced in their origin and nature. We will likely have to find a new way of dealing with them. The notion that federal spending can be held to its post-WW II norm of about 18 or 19 percent of GDP seems virtually impossible to maintain without severely cutting the major entitlement programs or eliminating the rest of government. In future years, spending on Social Security, Medicare, and Medicaid alone is anticipated to exceed 19 percent of GDP. The unpleasant implication is that a long-term resolution of these issues that does not destroy the role of the federal government in American society will have to include significant increases in tax revenues as a share of the economy.

Posted by DeLong at July 27, 2003 07:58 PM | TrackBack

Comments

So what real advantage does the US have over Europe or other economies that makes our standard of living that much higher? Basically, the US was untouched by WWII and was able to dominate economically over a devastated Europe and Japan. Equalize the playing field and our hegemony is threatened. This is all the more reason for a multilateralist approach to policy! ! :)

Posted by: bakho on July 27, 2003 08:38 PM

how long is it until you Yanks wake up to the fact that Republicans cause long term ruin to the US economy by being fiscally irresponsible.

Nixon, Reagan, Bush... Is your education system that bad?

Posted by: Homer Paxton on July 27, 2003 09:15 PM

Wow. I knew the sunsets and AMT were bad, but that bad.....

Posted by: Jason McCullough on July 28, 2003 12:54 AM

Homer, last I heard, the GOP outspent the Democratic Party by a factor of 2-3. Basically, concentrated wealth, crony capitalism, and a corrupt religious faction pulling the strings.

Posted by: Barry on July 28, 2003 03:56 AM

"...increasing life spans, the retirement of the baby boom generation, and changes in health care technology will generate persistent increases in spending on social security, medicare and medicaid that far outstrip the rate of growth of the economy."

This is Bush's fault just how? And since we can't have budget deficits without spending, why so little attention to that?

Posted by: Patrick R. Sullivan on July 28, 2003 07:20 AM

The future reality is not the fault of Mr. Bush. The problem is that Mr. Bush is ignoring the future reality and not preparing us economically and fiscally for the future. BTW- with Mr. Bush as president and the GOP in charge of congress, spending has increased from 19% to 20 % of GDP. Meanwhile, revenues have dropped to 16.3% of GDP.

The solution to SS crisis is already appearing. People are working longer and retired people are working part time. Welcome to Walmart.

Posted by: bakho on July 28, 2003 07:51 AM

Patrick, those factors are not Bush's fault. The refusal to look seriously at those factors and to take them into consideration when evaluating economic policies is. The resolute dismissal of these factors is. The stubborn clinging to flawed, even disastrous, economic policies is.

As for the spending, the reason so little attention is paid to it is that it has such a small impact. The mandated spending and the military spending, neither of which anyone wishes to touch, dominate the budget. I seem to recall that you could eliminate literally everything else in the federal budget and you would still have deficits.

Posted by: PaulB on July 28, 2003 08:31 AM

"The mandated spending and the military spending, neither of which anyone wishes to touch, dominate the budget."

Here's one person who wants to touch both.

19% of GDP on SS, Medicare, and Medicaid. If you think that's a good idea, I'm not voting for you.

SS is a pay-as-you-go system. You can have whatever I'm paying, but I think you should have to live with that. 15% of my wages is plenty.

Posted by: Chad Peterson on July 28, 2003 08:43 AM

What is always forgotten is that the underlying issue concerns the size of government, not the size of the deficit per se. The Republicans exercise what leverage they can muster on the tax side, denying government direct financing in order to make it small, and the democrats exercise what leverage they have on the spending side, financing be damned. The rest of us are caught in the middle, with the underlying question never resolved for any length of time, partly because it is never really debated directly in the first place.

Divisions of opinion like this have ruined lesser countries.

Posted by: Jim Harris on July 28, 2003 08:57 AM

"The Republicans exercise what leverage they can muster on the tax side, denying government direct financing in order to make it small"

Let's see the evidence, Jim, so we can be united on this front. How much has Dubya cut spending by during his time in office. What about the other Republican presidents? I guess if you keep saying that Republicans are for smaller government it must be true, right?

Posted by: achilles on July 28, 2003 09:16 AM

I've asked bakho before for the source of his figure of 16.3% and didn't get an answer. The CBO says it was 17.9% in 2002.

To PaulB, spending has exactly the same impact on the deficit as tax revenue. Dollar for dollar.

Posted by: Patrick R. Sullivan on July 28, 2003 09:21 AM

What we must do is cut government spending. As soon as we get Democrats who will abandon Social Security, Medicare, and Medicaid, all will be well. Republicans will be ohhh sooo happidy. Besides, the deficit must be all Clinton's doing.

Posted by: lise on July 28, 2003 09:23 AM

The real reason we may be able to pull through all this without major damage to our standard of living is that the U.S. dollar is the world's reserve currency. If the Euro, Yen, Renmimbi, or some other currency ever reaches parity with us we are doomed to an Argentina-style collapse.

BTW: Saddam started charging for Iraqui oil in Euros... Was that his weapon of mass destruction?

Posted by: claude tessier on July 28, 2003 09:28 AM

The real reason we may be able to pull through all this without major damage to our standard of living is that the U.S. dollar is the world's reserve currency. If the Euro, Yen, Renmimbi, or some other currency ever reaches parity with us we are doomed to an Argentina-style collapse.

BTW: Saddam started charging for Iraqui oil in Euros... Was that his weapon of mass destruction?

Posted by: claude tessier on July 28, 2003 09:30 AM

The real reason we may be able to pull through all this without major damage to our standard of living is that the U.S. dollar is the world's reserve currency. If the Euro, Yen, Renmimbi, or some other currency ever reaches parity with us we are doomed to an Argentina-style collapse.

BTW: Saddam started charging for Iraqui oil in Euros... Was that his weapon of mass destruction?

Posted by: claude tessier on July 28, 2003 09:30 AM

The real reason we may be able to pull through all this without major damage to our standard of living is that the U.S. dollar is the world's reserve currency. If the Euro, Yen, Renmimbi, or some other currency ever reaches parity with us we are doomed to an Argentina-style collapse.

BTW: Saddam started charging for Iraqui oil in Euros... Was that his weapon of mass destruction?

Posted by: claude tessier on July 28, 2003 09:32 AM

The real reason we may be able to pull through all this without major damage to our standard of living is that the U.S. dollar is the world's reserve currency. If the Euro, Yen, Renmimbi, or some other currency ever reaches parity with us we are doomed to an Argentina-style collapse.

BTW: Saddam started charging for Iraqui oil in Euros... Was that his weapon of mass destruction?

Posted by: claude tessier on July 28, 2003 09:34 AM

"The rest of us are caught in the middle, with the underlying question never resolved for any length of time, partly because it is never really debated directly in the first place."

All too true.

And are these 19% worries entirely due to taxation deadweight loss, or something else?

Posted by: Jason McCullough on July 28, 2003 09:42 AM

"The rest of us are caught in the middle, with the underlying question never resolved for any length of time, partly because it is never really debated directly in the first place."

All too true.

And are these 19% worries entirely due to taxation deadweight loss, or something else?

Posted by: Jason McCullough on July 28, 2003 09:45 AM

http://www.nytimes.com/2003/07/27/business/yourmoney/27BOSK.html

It Looked Good on Paper
By DANIEL ALTMAN

IN a flash of intuition, Michael J. Boskin had found a silver bullet. Or so it seemed.

About six months ago, Professor Boskin, an economist at Stanford who was chairman of the Council of Economic Advisers under the first President George Bush, released a paper suggesting that the federal government had a bounty of $12 trillion coming that no one had bothered to count.

Baby boomers and others, who spent decades making tax-free contributions to their I.R.A.'s and 401(k) plans, would soon begin paying taxes on withdrawals from those accounts, Professor Boskin noted. The windfall from all that, he argued, would more than cover the deficits in Social Security and Medicare. He even suggested that the government sell securities abroad, backed by the expected revenue, to cover its more imminent deficits.

But now it appears that Professor Boskin fired a blank....

Posted by: anne on July 28, 2003 10:57 AM

http://www.nytimes.com/2003/07/28/business/28ECON.html?hp

Red Ink in States Beginning to Hurt Economic Recovery
By LOUIS UCHITELLE

Having already stripped the nation of a source of economic growth, the budget crises in California and in almost every other state are now beginning to drag down the national economy, prolonging the weak, jobless recovery, the latest budget numbers show....

Posted by: anne on July 28, 2003 11:25 AM

No problem, at least we're not Japan. Say what?

Posted by: bill on July 28, 2003 11:41 AM

The rebuttal on Boskin's deferred tax savings paper addressed two of the supposed claims about his paper. Boskin's results did seem to hinge on an alleged increase in national savings, which sounded fishy. It was. Boskin's claim to have found something new sounded bogus. It was. My third problem with the supposed benefits from deferred taxation actually came from reading an NRO (Bartlett I think) review of it where NRO put forth the silly notion that the government could lend at risk-free rates and hope to recoup returns from the private sector investing in higher return investments. Boskin did scribble a lot on the appropriate discount rates but I was not sure whether he was to blame for this naive argument or whether this was the NRO's error. It would seem that the rebuttal to Boskin did not even consider it - so maybe it was the NRO misreading Boskin and not Boskin's fault after all.

Posted by: Hal McClure on July 28, 2003 11:49 AM

"spending has exactly the same impact on the deficit as tax revenue. Dollar for dollar."

OK, say we reduce Bill Gates' taxes and get the money by firing teachers.

What positive impact on the economy is attained by cutting Bill Gates' taxes? What's he going to do with the money that he isn't already doing with the $100 billion he already has?

But clearly firing teachers to finance that tax cut has a HUGE impact.

Posted by: IssuesGuy on July 28, 2003 11:54 AM

http://www.washingtonpost.com/wp-dyn/articles/A48107-2003Jul25.html

Figure it out. The revenue drops and GDP expands. The revenue as % of GDP shrinks.

Posted by: bakho on July 28, 2003 12:27 PM

http://www.cbpp.org/pubs/fedbud.htm

Figure it out. We got problems, folks, that is is you like social services and benefits.

Posted by: lise on July 28, 2003 12:45 PM

http://www.cbpp.org/7-23-03bud.htm

Figure it out. The deficit is a big big problem. The surplus was a blessing we have squandered with absurd tax cuts for the richee rich, and the consequences will be sharp and long for the middle class and poor. Imagine, I dared mention the poor. Shudders....

Posted by: lise on July 28, 2003 12:49 PM

June 13, the 10 year treasury yield was 3.11%. July 28, the treasury yield is 4.28. This is quite a sharp increase, and can in time effectively turn back the effect of the last 2 Fed rate cuts.

Posted by: anne on July 28, 2003 01:07 PM

Here is linkto revenue figures. I think the 2004 estimate will be too low if the stock market recovers enough.

http://www.tompaine.com/feature2.cfm/ID/8391

Under Presidents Reagan and Bush the elder, federal spending averaged 22 percent of GDP. George W. Bush’s budgets will take spending from around 20 percent of GDP toward 19 percent over the next decade.

Even skeptics who think Bush is lowballing his spending plans reckon he’ll come in at 21 percent -- the equivalent today of $100 billion a year less than what Ronald Reagan and Bush's father spent.

Revenue as a share of GDP is the measure to watch. From 21 percent of GDP in 2000 and 20 percent in 2001, revenue will drop to 16.3 percent of GDP this year, and 16 percent in 2004.

Posted by: bakho on July 28, 2003 01:37 PM

OK folks, try this. GDP is $10688 billion. 16.3% of GDP is $1742 billion.

Spending is about $2200 billion. Projected deficit is $455 billion.
Projected revenue is $1745 billion. Give or take a few rounding errors that is only 16.3% of GDP. A lot of economists are scratching their heads over why this number is so low. Tax cuts don't account for it.

BTW- Spending is 20.5% of GDP, up from the 19% that Clinton was spending. Just goes to show that the GOP fiscal policy since Reagan has been Borrow and Spend.

Posted by: bakho on July 28, 2003 02:01 PM

http://quote.bloomberg.com/apps/news?pid=10000085&sid=a7G3pr0qDIjs

"The European Central Bank is selling its holdings of Freddie Mac and Fannie Mae bonds and has recommended its national central banks do the same, according to a person who has seen the recommendation."

http://quote.bloomberg.com/apps/news?pid=10000103&sid=ahEpibmL5xvo

"U.S. Treasuries fell in New York, pushing 10-year note yields to the highest since December, as the government said it would borrow a record $230 billion in the third and fourth quarters to finance a growing budget deficit."

Posted by: dirk on July 28, 2003 02:15 PM

http://www.cm1.prusec.com/yararch.nsf/(Files)/a_072203.pdf/$file/a_072203.pdf

In the movie version of Tennessee Williams' play "A Streetcar Named Desire," Vivien Leigh plays Blanche DuBois, the spinsteresque, neurotic, Southern Belle. She's offered the arm of an elderly doctor as she's led away to the institution, "a place populated by 'strangers'... where real human contacts will once again be severed." Blanche says to the doctor, "Whoever you are, I have always depended on the kindness of strangers." We in America have never been more dependent on the kindness of foreigners than we are today. Over the past 12 months through May, the merchandise trade deficit totaled a record $511 billion. The balance of payments always balances, and over the past year a record $654 billion in purchases of U.S. financial securities by foreigners more than balanced the trade deficit (Figure A). Over the past 12 months through June, the Federal budget deficit totaled a near-record $312 billion, with kind foreigners financing 58% of this gap!

Cash Out. We may depend a great deal on foreigners fo finance our "twin deficits," but they depend greatly on our domestic market for their goods and services. Co-dependence can be healthy and good for all the parties involved. It can also be toxic. I am becoming a bit concerned about the amounts of foreign borrowing that are supporting the co-dependence relationship of Americans and all those kind foreigners, whoever they are. We are talking some very big numbers indeed. Let's first put our dependence on foreign capital inflows into some perspective.

Attempting to revive economic growth and jobs, the Federal Reserve has lowered the Federal Funds rate down to only 1%. Such easy credit terms have stimulated a record $767 billion in mortgage borrowing to finance new and existing home purchases over the past four quarters through the first quarter of this year.1 This total includes so-called "cash-outs" during mortgage refinancings, which have also boomed and provided homeowners with an opportunity to raise some extra liquidity. As they have borrowed against their home equity, most of these funds were parked in savings deposits, rather than spent, in my opinion. Savings deposits are up $534 billion over the past 52 weeks to a record $3.1 trillion through the week of July 7.2

http://online.wsj.com/article_email/0,,SB105941936666349100,00.html

In recent years, Fannie Mae and Freddie Mac have come to rely heavily on foreign investors to fund their rapid growth. In the 12 months ended May 2003, for example, foreign investors purchased $221 billion in so-called agency securities, up from $195 billion in 2002 and just $57 billion in 1998, according to Bianco Research LLC, a Chicago investment-research firm.

At Fannie Mae, some 34% of the company's so-called benchmark debt securities, one of its primary sources of funding, are held by non- U.S. investors. If that source of capital were to dry up, it would greatly increase Fannie Mae's and Freddie Mac's cost of borrowing, making them less profitable while also potentially driving mortgage rates higher.

There were already signs that foreign investors were growing wary of the two companies. Agency debt held in custody at the Federal Reserve on behalf of foreign central banks fell to $183.2 billion in the week ending July 23 from $188.9 billion in the week ending June 11.

Many market analysts say investors are losing interest in the two companies in part because they are becoming more aware of the risks the companies face. Historically, non-U.S. investors didn't seem to care much about the fundamentals of Fannie's and Freddie's businesses, largely because they believed the federal government would bail the two companies out if they ever ran into trouble.

The recent Freddie Mac accounting scandal could change that by reminding investors that the two companies aren't like the U.S. Treasury.

"If you start viewing Fannie and Freddie like stand-alone corporations, what you see is some of the most leveraged financial institutions in the world," said James A. Bianco, president of Bianco Research.

Posted by: dirk on July 28, 2003 02:41 PM

Yeah, the OMB data also put revenue at 17.9% of GDP in 2002, but revenue continues to deteriorate as does the budget deficit. OMB predicts 2003 revenues at 17.1% of GDP but that is old news. They also predicted a $300 billion deficits and that is off by $300 billion or so from the updates. You are looking at old numbers. Clinton collected over $2 trillion revenue in 2000 and spent under $1.8 trillion. 2003 revenue will be under $1.8 trillion and spending definately over $2.1 trillion if not $2.2 trillion. They use so many gimmicks, the war costs get added later etc. we are looking at a moving target.

Whether or not you like Bush and his policies, the imbalance between revenue and spending is not sustainable. The policy obviously needs to change.

Posted by: bakho on July 28, 2003 02:48 PM

BTW- The WH numbers from omb are here:

http://www.whitehouse.gov/omb/budget/fy2004/pdf/hist.pdf

They need to be updated.

Posted by: bakho on July 28, 2003 02:50 PM

And Sullivan, please note that the President's own OMB numbers show he is not planning to cut spending. Spending would jump from under $1.8 trillion in 2000 to over $2.7 trillion in 2008, a 50% increase in 8 years. Mr. Bush has plans to increase spending by at least $120 billion every year from now until 2008. These are the President's own numbers. So all this about GOP fiscal responsibility and they will cut spending is nonsense.

http://www.whitehouse.gov/omb/budget/fy2004/pdf/hist.pdf

Posted by: bakho on July 28, 2003 02:56 PM

a cryptic idea for a short sale: http://www.grantspub.com/search/index.php?search=TLT

"TICKER: TLT, TRADES AT 33X WITH ROIC OF ONLY 3.3%. REVENUES ARE GOING DOWN, COSTS ARE GOING UP. HUGE UNFUNDED RETIREE LIABILITIES. CFO DOESN'T MIND IF STOCK GOES DOWN." http://finance.yahoo.com/q?s=TLT&d=c

Posted by: dirk on July 28, 2003 03:08 PM

" Revenue as a share of GDP is the measure to watch. From 21 percent of GDP in 2000 and 20 percent in 2001, revenue will drop to 16.3 percent of GDP this year, and 16 percent in 2004."

Hmm, bakho recently you wrote:

" Patrick- you wrote 21% is an abberration and unsustainable. I agree. "

So, it seems disingenuous to be griping that we aren't going to have the 2000-01 figures (which were actually 20.8% and 19.8%).

Then there is the quesion of the predicted 16.3% figure for this year. The lowest I see for the last forty years is 17.2% in 1976, when the top marginal income tax rate was 70%, which would seem to indicate there is more to the story than tax rates. I repeat a post:

----------quote-----------
The below lists in the first column the % of GDP for federal government revenues, and in the second column spending as % of GDP:

1986 17.5 22.5
1987 18.4 21.6
1988 18.1 21.2
1989 18.3 21.2
1990 18.0 21.8
1991 17.8 22.3
1992 17.5 22.2
1993 17.6 21.5
1994 18.1 21.0
1995 18.5 20.7
1996 18.9 20.3
1997 19.3 19.5
1998 19.9 19.1
1999 20.0 18.6
2000 20.8 18.4
2001 19.8 18.6
2002 17.9 19.5

Why is it that when the top marginal rate was 28% on the very rich in 1987, revenues amounted to 18.4% of GDP. And after the TMR had been raised to almost 40%, revenues in 1994 were lower than in 1987?

And why is anyone projecting revenues will be 16% in the future with a TMR of, iirc, 33% ?

Posted by: Patrick R. Sullivan on July 21, 2003 03:57 PM
-------------endquote------------

Posted by: Patrick R. Sullivan on July 28, 2003 03:46 PM

Patrick, you aren't proposing the "tax cuts pay for themselves" theorem here, are you?

what your numbers demonstrate is that clinton/rubinomics was a fiscally responsible approach, and reagan/bush I/bush II have all had fiscally irresponsible approaches. was this your intent?

Posted by: howard on July 28, 2003 06:05 PM

Patrick, your answer to me was a non-answer. Unless you're prepared to cut Social Security, Medicare and military spending, there's little in the budget to cut. Certainly not enough to even make a dent in those massive deficits.

If you are prepared to cut the entitlement programs and the military, then by all means, say so. Just don't expect this administration or the Republican Congress to go along with you.

As for the figures you posted, they are meaningless, in and of themselves. Did you have a point to make?

Posted by: PaulB on July 28, 2003 08:27 PM

It seems to me that in 1986, the capital gains tax was raised from 20% to 28%, the largest capital gains tax in history and it happened under Reagan. Tax revenues increased almost 1% of GDP between 1986 and 1987.

Patrick, you miss the point that the truly wealthy investor class that owns almost half of the wealth in this country does not work income jobs that are taxed at 39% or 33%. They live off investments that are taxed at 20%. Note that between 93 and 94 revenue went up from 17.5 to 18.1% of GDP. That is huge! Under Clinton, capital gains taxes eventually went back down to 20%.

Just because the top rate is 39% does not mean that there are people that actually pay that percentage. It is much less.

Posted by: bakho on July 28, 2003 09:17 PM

I can't help but note that both PaulB and bakho are struggling mightily to keep their heads above water in their responses. So, as is my wont, I reach over and exert downward pressure on the scalp.

Paul, nothing you have said answers my point. $100 billion dollars of tax revenue still equals $100 billion dollars of spending.

bakho, whatever. And you are wrong about the largest incomes. Often they are stock options, which are taxed at income tax rates. A lot of people learned this the hard way when they exercise options and didn't cash them in right away. To find themselves stuck with huge tax liabilities when the market crashed.

Which still leaves you without an explanation for the 16% prediction.

Posted by: Patrick R. Sullivan on July 29, 2003 07:31 AM

Those that got taxed on the stock options also have a huge benefit. They have huge stock losses that can be used to balance any investment profits they make for years to come. Current tax code allows a write off of up to $3000 in investment losses and the remaining losses can be rolled over.

As for why revenue has declined for three years in a row, the CBO, OMB and numerous economists do not have an explanation. Revenue is just decreasing faster than estimates. This is a fact. One reason why it is difficult to figure why revenue is dropping is it takes IRS about 2 years to post its final data on revenue. So 2 years from now we may be able to discover why revenue is so low. We also know that revenue greatly exceeded estimates during the late 90s. This is why the budget came into balance much sooner than Clinton, the GOP or anyone expected.

Posted by: bakho on July 29, 2003 08:15 AM

Bakho provided an explanation for his number, but it is only a projection (as the CBOs is) for 2003. The CBO numbers, done in March, which predict that revenues will be 17.6% of GDP for 2003 were based on a deficit of $250 billion.

The deficit numbers have been revised upwards to $450 billion or so for next year and this year, Bakho was adjusting his forecast for revenues and spending (since the higher deficit is both due to increased spending and lowere revenues than prior forecasts) accordingly to come up with the ~16% number.

Bakho's assumptions as to how much of the deficit revision was due to higher spending or lower revenue may be imperfect, but quoting the CBO figures which were last revised in March doesn't really disprove his estimate.

Posted by: achilles on July 29, 2003 08:27 AM

http://www.whitehouse.gov/omb/budget/fy2004/summarytables.html#table9

Here are the President's own OMB numbers posted today. Note that revenue estimates are 1756 for 2003. Note that this is 16.4% of Q3 GDP estimate of $10,688 trillion and that number should go up in Q4. Note also that 2004 revenue estimates are also below $1.8 trillion. With GDP expansion, that will further decrease revenue as percent of GDP unless revenue recovers.

Also look at Table S9. It shows that the budget deficit would go away but for the spending policies that Mr. Bush is promoting that keep deficits above $200 billion for the rest of the decade and start to rise again at the end of the 5 y estimate. Mr. Bush no longer shows the 10 y because it is too ugly.

Reality is that Bush policies have created and are creating structural deficits. Why deny reality?

Posted by: bakho on July 29, 2003 08:28 AM

Correction to the last post. Revenue estimates are for 2003 $1756 billion and Q3 GDP is $10688 billion or $10.688 trillion.

Posted by: bakho on July 29, 2003 08:39 AM

Note, GDP will go up in Q4, not revenue estimate so revenue as % of GDP will come in below the 16.4%.

Posted by: bakho on July 29, 2003 08:42 AM

"And you are wrong about the largest incomes. Often they are stock options, which are taxed at income tax rates. "

I am no CEO nor a tax lawyer but I am pretty sure that the type of stock options CEOS receive are incentive options that are taxed at capital gains rates.

Paging Jim Glass....

Posted by: achilles on July 29, 2003 09:04 AM

No, Sullivan is right about stock options taxed as salary. The truly wealthy have shelters and ruses for manipulating the system. Still, the 2 million lost jobs means 2 million fewer tax payers. A very small percentage of tax payers pay top rate and only the income over the minimum level is taxed at that rate. The first $6000 of everyone's income is taxed at only 10%.

According to the Office of Management and Budget midsession review in fiscal 2002, the top revenue sources were individual income taxes ($858 billion), social insurance and retirement receipts ($700 billion), corporate income taxes ($148 billion) and excise taxes ($67 billion).

Thus, less than 10% of GDP is collected as income taxes.

Posted by: bakho on July 29, 2003 09:25 AM
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