Robert Ricketts
Frank M. Burke Chair in Taxation
October 2010
Trend Lines: Revenues &
Expenditures 2006-2010
(first 11 months each year)
Revenues
Gross
Change (%)
Expenditures
Gross
Change (%)
2,427,741
Deficit
Gross
Change (%)
2006
2,123,378
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%
$2,524,000
$2,104,600
($419,400)
-16.62%
Total
Explaining the Deficit
2008-2009 Budget Reconciliation
2008
Percent
Change
2009
Change
2,524,000
2,104,600
(419,400)
-16.62%
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%
383,718
450,825
67,107
+17.49%
(458,600)
(1,413,600)
(955,000)
208.24%
Tax Revenues (previous slide)
Expenditures:
All other
Deficit
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**
 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)
(before HCR)
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)
Overview
Social 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 billion
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) . 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 Benefits
2009 – 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 Projections
 Annual cost rate:
 2010
– 13.09% of “taxable payroll”
 2035 – 17.43% of “taxable payroll”
 Current tax rate (combined) – 15.3% of
“taxable payroll”
SSA Projections
For 75-year projection period, the shortfall in SS could
be eliminated by:
 Immediately
 Increasing
reducing benefits by 12%
.
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 real
wage 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 Projections
 Medicare, 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 Rates
Local, State & Federal (incl. FICA)
U.S.
Itemizers
Bottom
90%
$200,000
and above
Top 1%
Adjusted Gross
Income
Pct of
Itemizers
Share
of AGI
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%
$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%
$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%
Effective
Total Tax
Rate
49.45%
34.43%
32.56%
32.11%
33.52%
34.86%
35.44%
31.75%
34.91%
29.62%
28.55%
27.38%
25.71%
22.95%
28.26%