CBO’s Simple Story about the Deficit

By :: August 26th, 2011

A graph on the cover of the Congressional Budget Office’s summer budget update illustrates two policy paths we could pursue over the coming decade. One would essentially keep our deficit manageable through 2021. The other would make things much worse.

The light blue area in the graph shows the deficit’s history since 2000 and CBO’s projection over the coming decade if Congress lets the 2001-2003 tax cuts expire in 2013, stops patching the alternative minimum tax (AMT), and allows scheduled cuts in Medicare payments to physicians to occur. Under that scenario, the deficit would shrink to just 1.2 percent of GDP, a sustainable level in a healthy economy. (Of course, entitlements will explode the deficit in the long run but that's another story.)

If Congress doesn’t let current law play out for those three policies, the deficit would grow over the decade, reaching a level nearly four times the current law deficit in 2021 (see the dark blue area in the graph). Almost all of the increase in the deficit would come from extending the tax cuts and the interest payments on the debt increase (see the second graph, taken from CBO Director Doug Elmendorf’s blog on the update).

Few people want to see the tax cuts to expire as scheduled for all taxpayers in 2013. The debate last December focused on whether to extend them for everyone or only for the poorest 98 percent of Americans. The difference was between worsening the deficit by $3.6 trillion over the decade or by only $3 trillion. That’s not how to close the budget gap.

We'll resume the debate over extending the tax cuts as the new expiration date approaches at the end of next year. Letting the tax cuts and the AMT patch expire for everyone would slash the deficit but is surely not the best thing to do. Pruning back tax expenditures (both to raise revenue and to cut rates) and culling spending programs (including entitlements) are better alternatives. But making current law the starting point and the default outcome for budget negotiations could push the president and Congress to find better solutions.

Regardless of the spending and tax options on the table, though, it’s clear that a further extension of expiring tax cuts will only make it harder to solve our deficit problem.

8Comments

  1. Michael Bindner  ::  3:58 pm on August 26th, 2011:

    The key is for the Joint Fiscal Commission to commit to identifying (or claiming credit for) a spending cut for each tax cut or current law benefit it wishes to make permanent. Sticking to its charter levels will allow Obama to let the remaining tax cuts expire – which of course the GOP won’t let happen. Expect either a comprehensive solution which includes tax reform or nothing at all. If they are really smart, they will consider both the Center for Fiscal Equity Plan and the Bipartisan Policy Center Plan – both of which include some form of consumption tax and tax simplification.

  2. Michael Bindner  ::  4:02 pm on August 26th, 2011:

    Have you stopped allowing the sharing of posts on Facebook, or was this simply forgetten today?

  3. AMTbuff  ::  9:12 pm on August 26th, 2011:

    >(Of course, entitlements will explode the deficit in the long run but that’s another story.)

    There’s your conceptual problem right there. The long run challenge is NOT “another story”. It’s the ONLY story.

    We cannot afford to work on anything except the long-term gap, which is almost 100% health care spending. We ESPECIALLY cannot afford to spend tax increases on anything except solving the long-term problem.

    Markets are forward-looking, so it is unlikely that China others will continue to lend money to the US government for another full decade unless benefit promises are cut way back. Ignoring the health care spending problem is not an option. Making it even worse, as Obamacare did, merely hastens the day of reckoning. It’s not the S&P downgrade that concerns me, it’s the market’s downgrade.

    Incidentally, letting AMT relief expire would be a very poorly targeted tax increase. The truly rich would escape it, but upper middle class families with children would pay $4000 more. If you really want to propose taking the AMT exemption back to the unindexed set 20 years ago, then you should also advocate returning all tax brackets to the unindexed levels of 20 years ago. Then we can all be “rich”. And the paid would be spread uniformly rather than only onto upper middle class families with children.

  4. Ralph H  ::  9:50 am on August 27th, 2011:

    It is clear that we must let the Bush tax cuts expire — all of them. The constant harping on how only cuts for the wealthy should expire is nonsense as thatportion of the cuts brings in little revenue gain.

  5. Michael Bindner  ::  3:50 pm on August 28th, 2011:

    Finding another way to fund health spending, such as a VAT-like Net Business Receipts Tax (meaning wages and profit are both taxed) should take care of it, since increases the base and can both be increased rather invisibly and can have offsets for employers who can fund employee and retiree health care more cheaply than the government.

  6. Latasha  ::  8:17 pm on September 30th, 2011:

    Brilliance for free; your parents must be a sweehtreat and a certified genius.

  7. ueeefscv  ::  11:54 am on October 1st, 2011:

    PGbekB evininxywlvj

  8. jgkgzm  ::  7:37 am on October 3rd, 2011:

    jpsMEk yfcdpuurwvwa