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Main article: "Taxation in the United States

During FY2015, the federal government collected approximately $3.25 trillion in tax revenue, up $228B (billion) or 8% versus FY2014. Primary receipt categories included individual income taxes ($1,541B or 47% of total receipts), Social Security/Social Insurance taxes ($1,065B or 33%), and corporate taxes ($344B or 11%). Other revenue types included excise, estate and gift taxes.[1]

FY 2015 revenues were 18.2% of "gross domestic product (GDP), versus 17.6% in FY 2014 and 16.8% in FY 2013. Tax revenues averaged approximately 17.4% GDP over the 1980-2015 period, generally ranging plus or minus 2% from that level.[1]

Tax revenues are significantly affected by the economy. Recessions typically reduce government tax collections as economic activity slows. For example, tax revenues declined from $2.5 trillion in 2008 to $2.1 trillion in 2009, and remained at that level in 2010. From 2008 to 2009, individual income taxes declined 20%, while corporate taxes declined 50%. At 14.6% of GDP, the 2009 and 2010 collections were the lowest level of the past 50 years.[1]

Tax policy[edit]

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Revenue and Expense as % GDP.

Tax descriptions[edit]

The federal personal income tax is "progressive, meaning a higher marginal tax rate is applied to higher ranges of income. For example, in 2010 the tax rate that applied to the first $17,000 in taxable income for a couple filing jointly was 10%, while the rate applied to income over $379,150 was 35%. The top marginal tax rate has declined considerably since 1980. For example, the top tax rate was lowered from 70% to 50% in 1980 and reached as low as 28% in 1988. The "Bush tax cuts of 2001 and 2003, extended by President Obama in 2010, lowered the top rate from 39.6% to 35%.[12] The "American Taxpayer Relief Act of 2012 raised the income tax rates for individuals earning over $400,000 and couples over $450,000. There are numerous exemptions and deductions, that typically result in a range of 35–40% of U.S. households owing no federal income tax. The recession and tax cut stimulus measures increased this to 51% for 2009, versus 38% in 2007.[13] In 2011 it was found that 46% of households paid no federal income tax, however the top 1% contributed about 25% of total taxes collected.[14]

The federal payroll tax ("FICA) partially funds Social Security and Medicare. For the Social Security portion, employers and employees each pay 6.2% of the workers gross pay, a total of 12.4%. The Social Security portion is capped at $118,500 for 2015, meaning income above this amount is not subject to the tax. It is a "flat tax up to the cap, but regressive overall as it is not applied to higher incomes. The Medicare portion is also paid by employer and employee each at 1.45% and is not capped. Starting in 2013, an additional 0.9 percent more in Medicare taxes was applied to income of more than $200,000 ($250,000 for married couples filing jointly), making it a progressive tax overall.

For calendar years 2011 and 2012, the employee's portion of the payroll tax was reduced to 4.2% as an economic stimulus measure; this expired for 2013.[15] Approximately 65% percent of tax return filers pay more in payroll taxes than income taxes.[16]

Tax expenditures[edit]

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CBO charts describing amount and distribution of top 10 tax expenditures (i.e., exemptions, deductions, and preferential rates)

The term "tax expenditures" refers to income exemptions or deductions that reduce the tax collections that would be made applying a particular tax rate alone. According to the "Center for American Progress, annual tax expenditures have increased from $526 billion in 1982 to $1,025 billion in 2010, adjusted for inflation (measured in 2010 dollars).[17] Economist "Mark Zandi wrote in July 2011 that tax expenditures should be considered a form of government spending.[18]

In November 2009, "The Economist estimated the additional federal tax revenue generated from eliminating certain tax expenditures, for the 2013–2014 period. These included: income exemptions for employer-provided health insurance ($215 billion); and various income deductions such as mortgage interest ($147B), state & local taxes ($65B), capital gains on homes ($60B), property taxes ($33B) and municipal bond interest ($37B). This subset totals $557 billion.[19] The Congressional Joint Committee on Taxation estimated in 2008 the amount of federal tax expenditures for the five year (2008–2012) period.[20] The Office of Management and Budget (OMB) estimated these breaks for 2015.[21]

These tax expenditures are distributed unevenly across the income spectrum. According to a 2013 report from the CBO, the tax expenditures in that year would be an estimated $900 billion. The top 20% of income earners receive approximately 50% of the benefit from them and pay roughly 70% of federal taxes.[22]

Major expenditure categories[edit]

Expenditures in the United States federal budget
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CBO projections of U.S. Federal spending as % GDP 2014-2024

During FY2015, the federal government spent $3.68 trillion on a budget or cash basis, up $182 billion or 5% vs. FY2014 spending of $3.50 trillion. Major categories of FY 2015 spending included: Healthcare such as Medicare and Medicaid ($937B or 25% of spending), Social Security ($882B or 24%), non-defense discretionary spending used to run federal Departments and Agencies ($585B or 16%), Defense Department ($583B or 16%), other mandatory programs such as food stamps and unemployment compensation ($479B or 13%) and interest ($223B or 6%).[1]

Expenditures are classified as "mandatory", with payments required by specific laws to those meeting eligibility criteria (e.g., Social Security and Medicare), or "discretionary", with payment amounts renewed annually as part of the budget process. Around two thirds of federal spending is for "mandatory" programs. CBO projects that mandatory program spending and interest costs will rise relative to GDP over the 2016–2026 period, while defense and other discretionary spending will decline relative to GDP.[1]

Mandatory spending and social safety nets[edit]

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Social Security – Ratio of Covered Workers to Retirees
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Entitlement Spending Risks

"Social Security, "Medicare, and "Medicaid expenditures are funded by more permanent Congressional appropriations and so are considered mandatory spending.[23] Social Security and Medicare are sometimes called "entitlements," because people meeting relevant eligibility requirements are legally entitled to benefits, although most pay taxes into these programs throughout their working lives. Some programs, such as "Food Stamps, are appropriated entitlements. Some mandatory spending, such as Congressional salaries, is not part of any entitlement program. Mandatory spending accounted for 59.8% of total federal outlays (net of receipts that partially pay for the programs), with net interest payments accounting for an additional 6.5%. In 2000, these were 53.2% and 12.5%, respectively.[1]

Mandatory spending is expected to continue increasing as a share of GDP. This is due in part to demographic trends, as the number of workers continues declining relative to those receiving benefits. For example, the number of workers per retiree was 5.1 in 1960; this declined to 3.0 in 2010 and is projected to decline to 2.2 by 2030.[24][25] These programs are also affected by per-person costs, which are also expected to increase at a rate significantly higher than economic growth. This unfavorable combination of demographics and per-capita rate increases is expected to drive both Social Security and Medicare into large deficits during the 21st century. Unless these long-term fiscal imbalances are addressed by reforms to these programs, raising taxes or drastic cuts in discretionary programs, the federal government will at some point be unable to pay its obligations without significant risk to the value of the dollar (inflation).[26][27] By one estimate, 70% of the growth in these entitlement expenses over the 2016-2046 period is due to healthcare.[28]

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Note: CBO estimated in 2010 that policy changes with a 0.6% of GDP annual impact are sufficient to address the 75-year program shortfall. Abbreviations are explained in the chart page. Source: CBO Report-July 2010.

Discretionary spending[edit]

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Defense Spending 2001–2014.
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FY 2013 Estimated Federal Spending per 2013 Budget

Interest expense[edit]

CBO reported that net interest on the public debt was approximately $223 billion in FY2015 (6.1% of spending), down from $229 billion in FY2014. A higher level of debt was offset by lower interest rates.[1] During FY2012, the GAO reported a figure of $245 billion, down from $251 billion. Government also accrued a non-cash interest expense of $187 billion for intra-governmental debt, primarily the Social Security Trust Fund, for a total interest expense of $432 billion. GAO reported that even though the national debt rose in FY2012, the interest rate paid declined.[48] Should interest rates rise to historical averages, the interest cost would increase dramatically. Historian "Niall Ferguson described the risk that foreign investors would demand higher interest rates as the U.S. debt levels increase over time in a November 2009 interview.[49] As of January 2012, public debt owned by foreigners has increased to approximately 50% of the total or approximately $5.0 trillion.[50] As a result, nearly 50% of the interest payments are now leaving the country, which is different from past years when interest was paid to U.S. citizens holding the public debt. Interest expenses are projected to grow dramatically as the U.S. debt increases and interest rates rise from very low levels to more typical historical levels.[1]

Understanding deficits and debt[edit]

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Deficit and Debt Increases 2001-2016.
National debt of the United States

Relationship of deficit and debt[edit]

Intuitively, the annual budget deficit should represent the amount added to the national debt.[51] However, there are certain types of spending ("supplemental appropriations") outside the budget process which are not captured in the deficit computation, which also add to the national debt. Prior to 2009, spending for the wars in Iraq and Afghanistan was often funded through special appropriations excluded from the budget deficit calculation. In FY2010 and prior, the budget deficit and annual change in the national debt were significantly different. For example, the U.S. added $1 trillion to the national debt in FY2008 but reported a deficit of $455 billion. Due to rules changes implemented under President Obama in 2009, the two figures have moved closer together and were nearly identical in 2013 (a CBO reported deficit of $680 billion versus change in debt of $672 billion). For FY2014, the difference widened again, with the CBO reporting a deficit of $483 billion [52] versus a change in total debt outstanding of $1,086 billion.[53]

Debt categories[edit]

The total federal debt is divided into "debt held by the public" and "intra-governmental debt." The debt held by the public refers to U.S. government securities or other obligations held by investors (e.g., bonds, bills and notes), while Social Security and other federal trust funds are part of the intra-governmental debt. As of September 30, 2012 the total debt was $16.1 trillion, with debt held by the public of $11.3 trillion and intragovernmental debt of $4.8 trillion.[54] Debt held by the public as a percentage of GDP rose from 34.7% in 2000 to 40.3% in 2008 and 70.0% in 2012.[55] U.S. GDP was approximately $15 trillion during 2011 and an estimated $15.6 trillion for 2012 based on activity during the first two quarters.[56] This means the total debt is roughly the size of GDP. Economists debate the level of debt relative to GDP that signals a "red line" or dangerous level, or if any such level exists.[57] By comparison, China's budget deficit was 1.6% of its $10 trillion GDP in 2010, with a debt to GDP ratio of 16%.[58]

Risks associated with the debt[edit]

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Total Debt $ and % to GDP 2000–2015

The CBO reported several types of risk factors related to rising debt levels in a July 2010 publication:

However, since mid to late 2010, the U.S. Treasury has been obtaining "negative real interest rates at Treasury security auctions. At such low rates, government debt borrowing saves taxpayer money according to one economist.[60] There is no guarantee that such rates will continue, but the trend has remained falling or flat as of October 2012.[61]

Fears of a fiscal crisis triggered by a significant selloff of U.S. Treasury securities by foreign owners such as China and Japan did not materialize, even in the face of significant sales of those securities during 2015, as demand for U.S. securities remained robust.[62]

Government budget balance as a sectoral component[edit]

Sectoral financial balances
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"Sectoral financial balances in U.S. economy 1990-2015. By definition, the three balances must net to zero. Since 2009, the U.S. capital surplus and private sector surplus have driven a government budget deficit.

Economist "Martin Wolf explained in July 2012 that government fiscal balance is one of three major financial "sectoral balances in the U.S. economy, the others being the foreign financial sector and the private financial sector. The sum of the surpluses or deficits across these three sectors must be zero by "definition. Since the foreign and private sectors are in surplus, the government sector must be in deficit.

Wolf argued that the sudden shift in the private sector from deficit to surplus due to the "global economic conditions forced the government balance into deficit, writing: "The financial balance of the private sector shifted towards surplus by the almost unbelievable cumulative total of 11.2 per cent of gross domestic product between the third quarter of 2007 and the second quarter of 2009, which was when the financial deficit of US government (federal and state) reached its peak...No fiscal policy changes explain the collapse into massive fiscal deficit between 2007 and 2009, because there was none of any importance. The collapse is explained by the massive shift of the private sector from financial deficit into surplus or, in other words, from boom to bust."[63]

Economist "Paul Krugman also explained in December 2011 the causes of the sizable shift from private sector deficit to surplus: "This huge move into surplus reflects the end of the housing bubble, a sharp rise in household saving, and a slump in business investment due to lack of customers."[64]

CBO budget projections[edit]

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CBO-Public Debt Under "Extended" and "Alternate" Scenarios
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Spending for mandatory programs is projected to rise relative to GDP, while discretionary programs decline
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Interest to GDP, a measure of debt burden, was very low in 2015 but is projected to rise with both interest rates and debt levels over the 2016-2026 period.

Short-term outlook[edit]

CBO reported in October 2014: "The federal government ran a budget deficit of $486 billion in fiscal year 2014...$195 billion less than the shortfall recorded in fiscal year 2013, and the smallest deficit recorded since 2008. Relative to the size of the economy, that deficit—at an estimated 2.8 percent of gross domestic product (GDP)—was slightly below the average experienced over the past 40 years, and 2014 was the fifth consecutive year in which the deficit declined as a percentage of GDP since peaking at 9.8 percent in 2009. By CBO's estimate, revenues were about 9 percent higher and outlays were about 1 percent higher in 2014 than they were in the previous fiscal year."[2]

CBO reported in its February 2014 Budget and Economic Outlook (which covers the 2014-2024 period) that deficits were projected to return to approximately the historical average relative to the size of the economy (GDP) by 2014. CBO estimated that under current law, the deficit would total $514 billion in fiscal year 2014 or 3.0% GDP. Deficits would then slowly begin rising again through 2024 due primarily to the pressures of an aging population and rising healthcare costs per person. The debt to GDP ratio would remain stable for much of the decade then begin rising again toward the end of the 10-year forecast window, from 74% in 2014 to 79% in 2024.[1]

Long-term outlook[edit]

The "Congressional Budget Office (CBO) reports its Long-Term Budget Outlook annually, providing at least two scenarios for spending, revenue, deficits, and debt. The 2014 Outlook mainly covers the 25-year period through 2039.

The "extended baseline scenario" assumes that the laws currently on the books will be implemented, for the most part. CBO reported in July 2014 that under this scenario: "If current laws remained generally unchanged in the future, federal debt held by the public would decline slightly relative to GDP over the next few years. After that, however, growing budget deficits would push debt back to and above its current high level. Twenty-five years from now, in 2039, federal debt held by the public would exceed 100 percent of GDP. Moreover, debt would be on an upward path relative to the size of the economy, a trend that could not be sustained indefinitely. By 2039, the deficit would equal 6.5 percent of GDP, larger than in any year between 1947 and 2008, and federal debt held by the public would reach 106 percent of GDP, more than in any year except 1946—even without factoring in the economic effects of growing debt."[11]

The "extended alternative fiscal scenario" assumes the continuation of present trends, which result in a more unfavorable debt position and adverse economic consequences relative to the baseline scenario. CBO reported in July 2014 that under this scenario: "[C]ertain policies that are now in place but are scheduled to change under current law are assumed to continue, and some provisions of current law that might be difficult to sustain for a long period are assumed to be modified. Under that scenario, deficits excluding interest payments would be about $2 trillion larger over the first decade than those under the baseline; subsequently, such deficits would be larger than those under the extended baseline by rapidly increasing amounts, doubling as a percentage of GDP in less than 10 years. CBO projects that real GNP in 2039 would be about 5 percent lower under the extended alternative fiscal scenario than under the extended baseline with economic feedback, and that interest rates would be about three-quarters of a percentage point higher. Reflecting the budgetary effects of those economic developments, federal debt would rise to 183 percent of GDP in 2039."[11]

Over the long-term, CBO projects that interest expense and mandatory spending categories (e.g., Medicare, Medicaid and Social Security) will continue to grow relative to GDP, while discretionary categories (e.g., Defense and other Cabinet Departments) continue to fall relative to GDP. Debt is projected to continue rising relative to GDP under the above two scenarios, although the CBO did also offer other scenarios that involved austerity measures that would bring the debt to GDP ratio down.[11]

CBO estimated under the baseline scenario that the U.S. debt held by the public would increase approximately $8.5 trillion between the end of 2014 and 2024. Under a $2 trillion deficit reduction scenario during that first decade, federal debt held by the public in 2039 would stand at 75 percent of GDP, only slightly above the value of 72 percent at the end of 2013. Under a $4 trillion deficit reduction scenario for that decade, federal debt held by the public would fall to 42 percent of GDP in 2039. By comparison, such debt was 35 percent of GDP in 2007 and has averaged 39 percent of GDP during the past 40 years.[11]

CBO reported in September 2011: "The nation cannot continue to sustain the spending programs and policies of the past with the tax revenues it has been accustomed to paying. Citizens will either have to pay more for their government, accept less in government services and benefits, or both."[65]

CBO baseline for the Trump administration[edit]

In January 2017, the "Congressional Budget Office reported its baseline budget projections for the 2017-2027 time periods, based on laws in place as of the end of the Obama administration. CBO forecasted that "debt held by the public" would increase from $14.2 trillion in 2016 to $24.9 trillion by 2027, an increase of $10.7 trillion. These increases are primarily driven by an aging population, which impacts the costs of Social Security and Medicare, along with interest on the debt.[66] As President Trump introduces his budgetary policies, the impact can be measured against this baseline.

CBO also estimated that if policies in place as of the end of the Obama administration continued over the following decade, real GDP would grow at approximately 2% per year, the unemployment rate would remain around 5%, inflation would remain around 2%, and interest rates would rise moderately.[66] President Trump's economic policies can also be measured against this baseline.

Contemporary issues and debates[edit]

Political debates about the United States federal budget and "Deficit reduction in the United States

Conceptual arguments[edit]

Many of the debates surrounding the United States federal budget center around competing "macroeconomic schools of thought. In general, Democrats favor the principles of "Keynesian economics to encourage economic growth via a "mixed economy of both private and public enterprise, a "welfare state, and strong regulatory oversight. Conversely, Republicans generally support applying the principles of either "laissez-faire or "supply-side economics to grow the economy via small government, low taxes, limited regulation, and "free enterprise.[67][68] Debates have surrounded the appropriate size and role of the federal government since the founding of the country. These debates also deal with questions of morality, "income equality and "intergenerational equity. For example, Congress adding to the debt today may or may not enhance the quality of life for future generations, who must also bear the additional interest and taxation burden.[69]

Political realities make major budgetary deals difficult to achieve. While Republicans argue conceptually for reductions in Medicare and Social Security, they are hesitant to actually vote to reduce the benefits from these popular programs. Democrats on the other hand argue conceptually for tax increases on the wealthy, yet may be hesitant to vote for them because of the effect on campaign donations from the wealthy. The so-called budgetary "grand bargain" of tax hikes on the rich and removal of some popular tax deductions in exchange for reductions to Medicare and Social Security is therefore elusive.[70]

The Great Recession[edit]

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Comparison of actual U.S. Federal Spending 2008-2015 versus a trend line based on the 5% average annual increase from 1990-2008.

In the wake of the "2007-2009 U.S. recession, there were several important fiscal debates around key questions:

  1. What caused the sizable deficit increases during and shortly after the Great Recession? The CBO reported that the deficit expansion was mainly due to the economic downturn rather than policy choices. Revenue fell while social safety net spending increased for programs such as unemployment compensation and food stamps, as more families qualified for benefits.[71] From 2008 to 2009, the large deficit increase was also driven by spending on stimulus and bailout programs.[72]
  2. Should the "Bush tax cuts of 2001 and 2003 be allowed to expire in 2010 as scheduled? Ultimately, the Bush tax cuts were allowed to expire for the highest income taxpayers only as part of the "American Taxpayer Relief Act of 2012.
  3. Should significant deficits be continued or should fiscal "austerity be implemented? While the deficit jumped from 2008 to 2009, by 2014 it had fallen to its historical average relative to the size of the economy (GDP). This was due to the recovering economy, which had increased tax revenue. In addition, tax increases were implemented on higher-income taxpayers, while military and non-military discretionary spending were reduced or restrained (sequestered) as part of the "Budget Control Act of 2011.

Healthcare reform[edit]

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The Medicare Trustees reduced their forecast for Medicare costs as % GDP, mainly due to a lower rate of healthcare cost increases.

The CBO has consistently reported since 2010 that the "Patient Protection and Affordable Care Act (also known as "Obamacare") would reduce the deficit, as its tax increases and reductions in future Medicare spending offset its incremental spending for subsidies for low-income households. The CBO reported in June 2015 that repeal of the ACA would increase the deficit between $137 billion and $353 billion over the 2016-2025 period in total, depending on the impact of macroeconomic "feedback effects. In other words, ACA is a deficit reducer, as its repeal would raise the deficit.[73]

The Medicare Trustees provide an annual report of the program's finances. The forecasts from 2009 and 2015 differ materially, mainly due to changes in the projected rate of healthcare cost increases, which have moderated considerably. Rather than rising to nearly 12% GDP over the forecast period (through 2080) as forecast in 2009, the 2015 forecast has Medicare costs rising to 6% GDP, comparable to the Social Security program.[74]

The increase in healthcare costs is one of the primary drivers of long-term budget deficits. The long-term budget situation has considerably improved in the 2015 forecast versus the 2009 forecast per the Trustees Report.[75]

2016 Presidential election[edit]

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Projected effect of Trump's plans on the "debt-to-GDP ratio over ten years, as calculated "Moody's Analytics (light blue line) and the "Committee for a Responsible Federal Budget (orange line). The black line is the projection under current policy (as calculated by the "Congressional Budget Office), which is similar to the CRFB's projection for the policies of Trump's rival, Clinton.[4]

During the 2016 Presidential campaigns, Donald Trump and Hillary Clinton debated additional policies:

  • Should Social Security program benefits be expanded or curtailed? If laws are not changed, Social Security payments will be cut by roughly 25% in the early 2030s. There is active "debate about the future of the program, as the population ages.
  • What changes, if any, should be made to tax and transfer payment policies to address growing "income inequality? The "American Taxpayer Relief Act of 2012 raised taxes on the higher-income taxpayers, increasing their effective tax rates. However, as of 2014 the U.S. was 30th percentile globally on income inequality and ranked last (most unequal) among the developed (OECD) countries.[76]
  • Presidential candidate Donald Trump has proposed approximately $10 trillion in income tax cuts over a decade. Since those with higher income pay most of the income tax, the benefits would go dis-proportionally to them. On the other hand, Presidential candidate Hillary Clinton has proposed raising taxes moderately on the top 5% of income earners; the top 1% would pay three-fourths of the tax increase. Her plan calls for up to $500 billion in additional revenue over a decade. Both Trump and Clinton have called for additional infrastructure investment.[77]

Public opinion polls[edit]

According to a December 2012 Pew Research Center poll, only a few of the frequently discussed deficit reduction ideas have majority support:

  • 69% support raising the tax rate on income over $250,000.
  • 54% support limiting deductions taxpayers can claim.
  • 52% support raising the tax on investment income.
  • 51% support reducing Medicare payments to high-income seniors.
  • 51% support reducing Social Security payments to high-income seniors.

Fewer than 50% support raising the retirement age for Social Security or Medicare, reducing military defense spending, limiting the mortgage interest deduction, or reducing federal funding for low income persons, education and infrastructure.[78]

Proposed deficit reduction[edit]

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Report of the National Commission on Fiscal Responsibility and Reform-Public Debt as % GDP Under Various Scenarios
Deficit reduction in the United States

Strategies[edit]

There are a variety of proposed strategies for reducing the federal deficit. These may include policy choices regarding taxation and spending, along with policies designed to increase economic growth and reduce unemployment. For example, a fast-growing economy offers the "win-win outcome of a larger proverbial economic pie, with higher employment and tax revenues, lower safety net spending and a lower debt-to-GDP ratio. However, most other strategies represent a tradeoff scenario in which money or benefits are taken from some and given to others. Spending can be reduced from current levels, frozen, or the rate of future spending increases reduced. Budgetary rules can also be implemented to manage spending. Some changes can take place today, while others can phase in over time. Tax revenues can be raised in a variety of ways, by raising tax rates, the scope of what is taxed, or eliminating deductions and exemptions ("tax expenditures"). Regulatory uncertainty or barriers can be reduced, as these may cause businesses to postpone investment and hiring decisions.[79]

The CBO reported in September 2011 that: "Given the aging of the population and rising costs for health care, attaining a sustainable federal budget will require the United States to deviate from the policies of the past 40 years in at least one of the following ways:

  • Raise federal revenues significantly above their average share of GDP;
  • Make major changes to the sorts of benefits provided for Americans when they become older; or
  • Substantially reduce the role of the rest of the federal government relative to the size of the economy."[80]

During June 2012, Federal Reserve Chair "Ben Bernanke recommended three objectives for fiscal policy: 1) Take steps to put the federal budget on a sustainable fiscal path; 2) Avoid unnecessarily impeding the ongoing economic recovery; and 3) Design tax policies and spending programs to promote a stronger economy.[81]

President "Barack Obama stated in June 2012: "What I've said is, let's make long-term spending cuts; let's initiate long-term reforms; let's reduce our health care spending; let's make sure that we've got a pathway, a glide-path to fiscal responsibility, but at the same time, let's not under-invest in the things that we need to do right now to grow. And that recipe of short-term investments in growth and jobs with a long-term path of fiscal responsibility is the right approach to take for, I think, not only the United States but also for Europe."[82]

Specific proposals[edit]

A variety of government task forces, expert panels, private institutions, politicians, and journalists have made recommendations for reducing the deficit and slowing the growth of debt. Several organizations have compared the future impact of these plans on the deficit, debt, and economy. One helpful way of measuring the impact of the plans is to compare them in terms of revenue and expense as a percentage of GDP over time, in total and by category. This helps illustrate how the different plan authors have prioritized particular elements of the budget.[83]

Government commission proposals[edit]

  • President Obama established a budget reform commission, the "National Commission on Fiscal Responsibility and Reform which released a draft report in December 2010. The proposal is sometimes called the "Bowles-Simpson" plan after the co-chairs of the Commission. It included various tax and spending adjustments to bring long-run government tax revenue and spending into line at approximately 21% of GDP, with $4 trillion debt avoidance over 10 years. Under 2011 policies, the national debt would increase approximately $10 trillion over the 2012-2021 period, so this $4 trillion avoidance reduces the projected debt increase to $6 trillion.[84] The Center on Budget and Policy Priorities analyzed the plan and compared it to other plans in October 2012.[85]

President Obama's proposals[edit]

  • President Obama announced a 10-year (2012–2021) plan in September 2011 called: "Living Within Our Means and Investing in the Future: The President's Plan for Economic Growth and Deficit Reduction." The plan included tax increases on the wealthy, along with cuts in future spending on defense and Medicare. Social Security was excluded from the plan. The plan included a net debt avoidance of $3.2 trillion over 10 years. If the "Budget Control Act of 2011 is included, this adds another $1.2 trillion in deficit reduction for a total of $4.4 trillion.[86] The "Bipartisan Policy Center (BPC) evaluated the President's 2012 budget against several alternate proposals, reporting it had revenues relative to GDP similar to the Domenici-Rivlin and Bowles-Simpson expert panel recommendations but slightly higher spending.[83]
  • President Obama proposed during July 2012 allowing the "Bush tax cuts to expire for individual taxpayers earning over $200,000 and couples earning over $250,000, which represents the top 2% of income earners. Reverting to Clinton-era tax rates for these taxpayers would mean increases in the top rates to 36% and 39.6% from 33% and 35%. This would raise approximately $850 billion in revenue over a decade. It would also mean raising the tax rate on investment income, which is highly concentrated among the wealthy, to 20% from 15%.[87]

Congressional proposals[edit]

  • The House of Representatives Committee on the Budget, chaired by Rep. "Paul Ryan (R), released "The Path to Prosperity: Restoring America's Promise and a 2012 budget. The Path focuses on tax reform (lowering income tax rates and reducing tax expenditures or loopholes); spending cuts and controls; and redesign of the Medicare and Medicaid programs. It does not propose significant changes to Social Security.[88] The "Bipartisan Policy Center (BPC) evaluated the 2012 Republican budget proposal, noting it had the lowest spending and tax revenue relative to GDP among several alternatives.[89]
  • The Congressional Progressive Caucus (CPC) proposed "The People's Budget" in April 2011, which it claimed would balance the budget by 2021 while maintaining debt as a % GDP under 65%. It proposed reversing most of the Bush tax cuts; higher income tax rates on the wealthy and restoring the estate tax, investing in a jobs program, and reducing defense spending.[90] The BPC evaluated the proposal, noting it had both the highest spending and tax revenue relative to GDP among several alternatives.[91] The CPC also proposed a 2014 budget called "Back to Work." It included short-term stimulus, defense spending cuts, and tax increases.[92]
  • Congressmen Jim Cooper (D-TN) and Steven LaTourette (R-OH) proposed a budget in the House of Representatives in March 2012. While it did not pass the House, it received bi-partisan support, with 17 votes in favor from each party. According to the BPC: "...the plan would enact tax reform by lowering both the corporate and individual income tax rates and raising revenue by broadening the base. Policies are endorsed that improve the health of the Social Security program, restrain health care cost growth, control annually appropriated spending, and make cuts to other entitlement programs." The plan proposes to raise approximately $1 trillion less revenue over the 2013-2022 decade than the Simpson-Bowles and Domenici-Rivlin plans, while cutting non-defense discretionary spending more deeply and reducing the defense spending cuts mandated in the Budget Control Act of 2011.[93] According to the "Center on Budget and Policy Priorities, this plan is ideologically to the Right of either the Simpson-Bowles or Domenici-Rivlin plans.[94]
  • In May 2012, House Republicans put forward five separate budget proposals for a vote in the Senate. The Republican proposals included the House-approved proposal by House Budget Chairman "Paul Ryan and one that was very close in content to the budget proposal submitted earlier in 2012 by President Barack Obama.[95] The other three proposals each called for greatly reduced government spending. The budget put forward by Senator "Mike Lee would halve the government over the next 25 years. Senator "Rand Paul's budget included proposed cuts to Medicare, Social Security benefits and the closure of four Cabinet departments. The budget plan from Senator "Patrick Toomey aimed to balance the budget within eight years. All five of the proposed plans were rejected in the Senate.[96][97]

Private expert panel proposals[edit]

  • The Peter G. Peterson Foundation solicited proposals from six organizations, which included the American Enterprise Institute, the "Bipartisan Policy Center, the Center for American Progress, the Economic Policy Institute, The Heritage Foundation, and the Roosevelt Institute Campus Network. The recommendations of each group were reported in May 2011.[98] A year later, Solutions Initiative II asked five leading think tanks — the American Action Forum, the Bipartisan Policy Center, the Center for American Progress, the Economic Policy Institute, and The Heritage Foundation — to address the near-term fiscal challenges of the "fiscal cliff" while offering updated long-term plans.[99] In 2015, the Peterson Foundation invited the American Action Forum, the American Enterprise Institute, the Bipartisan Policy Center, the Center for American Progress, and the Economic Policy Institute to developed specific, "scoreable" policy proposals to set the federal budget on a sustainable, long-term path for prosperity and economic growth. [100]
  • The "Bipartisan Policy Center (BPC) sponsored a Debt Reduction Task Force, co-chaired by "Pete V. Domenici and "Alice M. Rivlin. The Domenici-Rivlin panel created a report called "Restoring America's Future," which was published in November 2010. The plan claimed to stabilize the debt to GDP ratio at 60%, with up to $6 trillion in debt avoidance over the 2011-2020 period. Specific plan elements included defense and non-defense spending freezes for 4–5 years, income tax reform, elimination of tax expenditures, and a national sales tax or "value-added tax (VAT).[101][102]
  • The "Hamilton Project published a guidebook with 15 different proposals from various policy and budget experts in February, 2013. The authors were asked to provide pragmatic, evidenced-based proposals that would both reduce the deficit and bring broader economic benefits. Proposals included a "value added tax and reductions to "tax expenditures, among others.[103]

Timing of solutions[edit]

There is significant debate regarding the urgency of addressing the short-term and long-term budget challenges. Prior to the 2008-2009 U.S. recession, experts argued for steps to be put in place immediately to address an unsustainable trajectory of federal deficits. For example, Fed Chair "Ben Bernanke stated in January 2007: "The longer we wait, the more severe, the more draconian, the more difficult the objectives are going to be. I think the right time to start was about 10 years ago."[104]

However, experts after the 2008-2009 U.S. recession argued that longer-term austerity measures should not interfere with measures to address the short-term economic challenges of high unemployment and slow growth. Ben Bernanke wrote in September 2011: "...the two goals--achieving fiscal sustainability, which is the result of responsible policies set in place for the longer term, and avoiding creation of fiscal headwinds for the recovery--are not incompatible. Acting now to put in place a credible plan for reducing future deficits over the long term, while being attentive to the implications of fiscal choices for the recovery in the near term, can help serve both objectives."[105]

IMF managing director "Christine Lagarde wrote in August 2011: "For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation [deficit reduction] plans. At the same time we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects. So fiscal adjustment must resolve the conundrum of being neither too fast nor too slow. Shaping a Goldilocks fiscal consolidation is all about timing. What is needed is a dual focus on medium-term consolidation and short-term support for growth and jobs. That may sound contradictory, but the two are mutually reinforcing. Decisions on future consolidation, tackling the issues that will bring sustained fiscal improvement, create space in the near term for policies that support growth and jobs."[106]

Total outlays in recent budget submissions[edit]

""
""
Annual U.S. spending 1930-2014 alongside U.S. GDP for comparison.
""
""
Federal, State, and Local spending history.

The budget year runs from October 1 to September 30 the following year and is submitted by the President to Congress prior to October for the following year. In this way the budget of 2013 is submitted before the end of September 2012. This means that the budget of 2001 was submitted by Bill Clinton and was in force during most of George W. Bush's first year in office. The budget submitted by George W. Bush in his last year in office was the budget of 2009, which was in force through most of Barack Obama's first year in office.

The President's budget also contains revenue and spending projections for the current fiscal year, the coming fiscal years, as well as several future fiscal years. In recent years, the President's budget contained projections five years into the future. The Congressional Budget Office (CBO) issues a "Budget and Economic Outlook" each January and an analysis of the President's budget each March. CBO also issues an updated budget and economic outlook in August.

Actual budget data for prior years is available from the Congressional Budget Office; see the "Historical Budget Data" links on the main page of the "The Budget and Economic Outlook."[108] and from the Office of Management and Budget (OMB).[109]

See also[edit]

References[edit]

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External links[edit]

Recent CBO documents[edit]

"Chart talk" examples[edit]

One of the best ways to understand the long-term budget risks is through helpful charts. The following sources contain charts and commentary:

Budget games and simulations[edit]

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