Generational Outlook: The Federal Budget Now and in the Future THE CONCORD COALITION

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1 Generational Outlook: The Federal Budget Now and in the Future presented by Joshua Gordon, Policy Director THE CONCORD COALITION Composition of Projected FY 2012 Federal Government Revenues and Outlays (Deficit: $1.128 Trillion) $4,000 $3,500 Interest $220 $3,000 $2,500 $2,000 $1,500 $1,000 Domestic* Defense Other Mandatory Medicare & Medicaid $620 $669 $214 $235 $566 $719 $851 Estate & Gift Taxes ($11 billion) Other Taxes Corporate Taxes Social Insurance Taxes $500 $0 Social Security $769 Outlays: $3.56 trillion *Includes all appropriated domestic spending such as education, transportation, homeland security, housing assistance and foreign aid. Source: Congressional Budget Office, August $1,159 Revenues: $2.44 trillion Individual Income Taxes 1

2 Automatic expenditures are consuming a growing share of the budget * 2022* 56% 37% 39% 47% 36% 58% 25% 64% 7% 14% 6% 11% Mandatory Net Interest Discretionary *Projected Source: Congressional Budget Office, March Outlays of Select Mandatory Spending Programs (FY 2012 Projected) $800 $770 $700 $600 In Billions of Dollars $500 $400 $300 $200 $100 $0 Social Security $475 $262 Medicare Medicaid $144 Federal Retirement & Disability $82 $79 $80 Unemployment Comp. Earned Income & Child Tax Credits Food Stamps $26 $19 $13 Family Support Child Agriculture Nutrition Source: Congressional Budget Office, January

3 Outlays of Select Non-Defense Discretionary Programs (FY 2012 Projected) Education Transp. Housing Veterans Foreign Aid Natural Science, General Agriculture Energy & Resources Space & Government Nutrition Asst. Technology *includes ground, air, and water Source: Congressional Budget Office, January Percent of GDP 4.5% 4.0% 3.5% 3.0% 2.5% Domestic Discretionary Projected to be Cut Dramatically Fiscal Years Historical Average ( ) Lowest Level Since 1970 CBO Baseline Jan 2011 After BCA Discretionary Caps BCA Caps + Sequester 2.0% Source: Congressional Budget Office, January 2011, August 2012 and Concord analysis. 3

4 Defense Discretionary Spending as a Percentage of GDP Projected As a Percentage of GDP Source: Congressional Budget Office, January Largest Tax Expenditures Fiscal Years $700 $600 Billions of Dollars $500 $400 $300 $200 $100 $0 Exclusion of Employer Provided Health Care Mortgage Interest Deduction Long-Term Capital Gains Rates Net Exclusion of Defined Benefit Contributions Earned Income Credit State and Local Income Deductions Net Exclusion of Defined Contribution Plans Exclusion of Capital Gains at Death Charitable Contributions Deduction Exclusion of Untaxed Social Security Benefits Tax expenditures are any reduction in income tax liabilities that result from special tax provisions or regulations that provide tax benefits to particular taxpayers. These special income tax provisions are referred to as tax expenditures because they may be considered analogous to direct outlay programs. Source: Joint Committee on Taxation, JCX-15-11, February 28,

5 How Marginal Tax Rates Work: First Calculate Taxable Income Gross Income (Wages, Dividends, Capital Gains, Tips, etc.) Less Certain Deductions (IRA contributions, alimony payments, some educator and student expenses) = Adjusted Gross Income (AGI) Less Standard Deduction (taken by 70% of taxpayers) Or Itemized Deductions (Charitable Contributions, Mortgage Interest, State & Local Taxes, etc.) = Taxable Income ($100,000 in this case) How Marginal Tax Rates Work: Only your taxable income in the last bucket get taxed at the highest rate. This highest rate also determines the value of your deductions. = $100,000 15% $8,700 Note: 2012 Income Tax Rates/Brackets 33% 35% 5

6 Who is at which rate? Number of taxpayers at each marginal income tax rate 35% 30% 31% 25% 20% 17.90% 15% 18.70% 15.30% 13% 10% 5% 0% Non-filers 0% 10% 15% 25% 26% (AMT) 1.10% 1.40% 1.40% 1.00% 28% 28% (AMT) 0.20% 33% 35% Source: Urban-Brookings Tax Policy Center Microsimulation Model (version )(Table T ) Federal Spending vs. Revenues as a Percentage of GDP (FY ) 26% 24% Average outlays: 20.9% Percentage of GDP 22% 20% 18% 16% Average revenues: 18.3% 14% Total Outlays Revenues Source: Congressional Budget Office, January

7 Debt Held by the Public as a Percentage of GDP World War II 109% As a Percentage of GDP to % è 68% Source: OMB Historical Tables and CBO, January % Percentage of Debt Held by the Public Owned by Foreigners ( ) Percentage of Ownership of Publicly-Held Debt 50% 40% 30% 20% 10% 0% Source: United States Treasury Department, Treasury Bulletin, Table OFS-2, December

8 In Billions of Dollars Concord Plausible Baseline Interest Costs Explode Under Current Policies Source: Congressional Budget Office and Concord Analysis, January

9 Sources of Growth in the Federal Budget Fiscal Years % 6% Current Individual Income Taxes = 7.2% 4% Medicare Current Defense Spending = 4.4% Interest 2% Medicaid* 0% Social Security All Other Noninterest Spending -2% *Includes outlays for CHIP and exchange subsides.. Source: Congressional Budget Office. Long- Term Budget Outlook, Alterna=ve Fiscal Scenario, June Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security 25.0 As a Percentage of GDP Effect of Aging Spending Without Aging and Health Care Cost Growth Effect of Health Care Cost Growth Percent of Growth Attributed to: Health Care Cost Growth 36% 56% Aging 64% 44% Source: Congressional Budget Office, June 2010 &

10 As a Percentage of GDP Americans are Living Longer and Having Fewer Children Consequently, fewer workers are available to support each Social Security recipient 1960: 5.1 to 1 Today: 2.9 to : 2.1 to 1 Source: Social Security and Medicare Trustees Report, Medicare Costs Potentially Soar in Coming Decades Calendar Year Income from dedicated taxes, premiums, and state transfers General Revenues required to fund the program Projected additional expenditures under Alternative Physician Payment Projection Projected additional expenditures under Alternative Scenario Source: Medicare Trustees Report, May,

11 Federal Health Care Spending Under Current Law 11.0 Percentage of GDP Projection 2010 Projection Projection 2010 Projection Excluding Effects of Recent Health Care Legislation Source: Congressional Budget Office, June Debt Held by the Public as a Percentage of GDP Actual Projected As a Percentage of GDP World War II 109% % Source: GAO Analysis, Spring 2012 and OMB Historical Tables

12 Looking at the Commission Report 12