Tax and Budget Issues Facing
the Next President
Jon Forman
Alfred P. Murrah Professor of Law
University of Oklahoma
www.law.ou.edu/faculty/forman.shtml
Law and Society Association
Law, Society, and Taxation Panel 01
Montreal, Canada
May 29, 2008
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The Budget Outlook
• Short-term
– Congressional Budget Office, The Budget and
Economic Outlook: Fiscal Years 2008 to 2018
(January 23, 2008)
• Long-term
– Congressional Budget Office, The Long-Term
Budget Outlook (December 2007)
– David Walker, Fiscal Social Security and
Health Care Challenges (GAO-07-345CG,
2008)
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Social Security Finances 2007
Trust Fund income = $785 billion (taxes)
Trust Fund outgo = $595 billion (benefits)
Surplus =
$190 billion
Social Security Administration 2008 Trustees’ Report
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Social Security Administration, 2008 Trustees’ Report
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The Long-Range 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.
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Social Security’s Financing
Problem
• 2008 Trustees Report shows
– Expenses will exceed payroll tax income in 2017
– Trust funds will be out of money in 2041
• 75-year deficit equals 1.70% of taxable payroll
– Immediate payroll tax increase of 1.70% needed to
restore actuarial balance
– Alternatively, immediate 11.5% across-the-board benefit
cut
– $4.3 trillion unfunded liability (over 75 years)
– About 0.6% as a share of the entire economy (GDP)
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SS Unfunded Obligations
(Present values as of January 1, 2008; trillions of
dollars)
Present
As a % of
As a % of
value
future
GDP
payroll
Over the
infinite
horizon
Over the
next 75
years
$13.6
3.2
1.1
4.3
1.6
.6
Social Security Administration, 2008 Trustees’ Report, Table IV.B6.
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2008 Medicare Trustees’ Report
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HI Unfunded Obligations
(Present values as of January 1, 2008; trillions of
dollars)
Present
As a % of
As a % of
value
HI taxable GDP
payroll
Over the
infinite
horizon
Over the
next 75
years
$34.4
6.1
2.6
12.4
3.4
1.6
Social Security Administration, 2008 Medicare Trustees’ Report, Table III.B10.
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Effects of Extending Expiring Tax Provisions
(Billions of dollars)
Tax provision
Expiration
date
12/31/10
2009
2012
-1.5
-66.7
Total
2009-18
-667.8
Income Tax,
EGTRRA
12/31/10
n.a.
-166.6
-1,325.0
15% rate, c.g.
12/31/10
n.a.
3.1
-75.3
15% rate, div.
12/31/10
0.2
-17.3
-177.8
Increased AMT
exemption
12/31/07
-73.3
-38.1
-646.2
All
Various
-91.0
-384.9
-3,830.4
Estate & Gift
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Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2008 to 2018, Table 4-9
Clearly Revenues Are Needed
• The revenues that are expected to result from
that scheduled expiration of those tax cuts are
built in to the baseline numbers that Congress
and the president use to put together the annual
budget.
• No agreement means all those tax provisions
expire
– Is that a tax increase?
• I expect Congress and the President to agree
– Is that a tax cut?
– How big a deficit can they live with?
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Top 10 Income Tax Expenditures, 2009
(Billions of Dollars)
Health insurance exclusion
Mortgage interest deduction
$168
101
401(k) plans
Charitable contrib. (other than health & education)
Accelerated depreciation
Capital gains (except timber, iron ore, coal)
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47
44
55
Deductible nonbusiness state and local taxes
other than on houses
Employer plans
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Step-up of basis at death
Capital gains exclusion on homes
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2009 Federal Budget, Analytical Perspectives, Chapter 19, Tax Expenditures, Table 19-3
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McCain's Proposed Tax Plan
(Billions of Dollars)
Provisions and sources
FY2009 FY2012
20092018
(1) Extend non-estate tax cuts
0
-179
-1,663
(2) Repeal the individual AMT
-91
-140
-1,761
(3) Double the dependent exemption
-38
-44
-464
(4) $5 mil. estate tax exemption, 15% rate
-17
-36
-354
-139
-143
-1,363
-7
-12
-133
(5) Reduce corp. tax rate to 25%, etc.
(6) Permanent R&D credit
(7) Gas tax holiday
-10
-10
Total of above provisions
-302
-553
Taxes as % of GDP (current law)
18.9
20.0
Taxes as % of GDP (proposed)
16.9
16.8
-5,748
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Urban-Brookings Tax Policy Center, T08-0071
Options to Adjust Social Security Earnings
Cap
Calendar Year
2009
Eliminate Earnings Cap
Create "Donut Hole" up to
$200,000
2009-18
123.7
1,476.4
70.4
841.4
Urban-Brookings Tax Policy Center T08-0001
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Tax Base
•
•
•
•
Income
Consumption
Earnings
Wealth
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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
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Conclusion
• Tax laws are always temporary
– No tax break or tax rate is ever safe for long
• Congress is already counting on trillions when
Bush cuts expire
– More needed to fix the AMT, Social Security, and
Medicare.
• President needs 60 votes in the U.S. Senate
– The whole tax system will be in play
– The lobbyists will be tripping over each other
• Change is always incremental
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About the Author
• Jonathan Barry Forman (“Jon”) is the Alfred P. Murrah
Professor of Law at the University of Oklahoma, 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),
http://www.urban.org/books/makingamericawork/index.cfm.
• 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 he also has
master’s degrees in economics and psychology.
• Jon can be reached at jforman@ou.edu or (405) 325-4779.
His web page is www.law.ou.edu/faculty/forman.shtml.
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