Federal taxes in fiscal year 2009 claimed the smallest share of GDP since 1950—14.9 percent according to the Congressional Budget Office (see top figure). The revenue drop has many causes: tax reductions in this year’s economic stimulus, the collapse of the economy, and the Bush tax cuts from earlier in the decade.

Revenues will rebound to higher levels over the next few years but how high they will go depends on what happens to tax policy. If Congress does nothing and current tax law plays out over the coming decade, revenues will jump in 2011 when most of the Bush tax cuts expire and the alternative minimum tax (AMT) hits more and more victims. By 2019, again according to CBO, taxes would claim 20 percent of GDP, well above the 1961-2008 average of 18.2 percent (see bottom figure).

The Obama administration asserts a different revenue baseline from current law. It would make the Bush tax cuts permanent, set the estate tax at 2009 levels (indexed for inflation), and permanently patch the AMT. Those changes would substantially reduce future revenues, leaving taxes at 18.0 percent of GDP in 2019, slightly below the long-run average.

In its 2010 budget, the administration proposes to raise taxes on high-income taxpayers by taking back the Bush tax cuts granted in its baseline and limiting the value of itemized deductions. Those actions would lift federal revenues starting in 2011 and boost 2019 taxes to 18.8 percent of GDP, a little more than the long-run average.

Strictly in terms of taxes, there’s nothing particularly right or wrong with any of the three future scenarios. Whether we’re above or below our 50-year average has no evaluative importance. What does matter, however, is that all three revenue paths fall far short of the 23.6 percent of GDP that CBO projects the government will spend in 2019. Maybe Congress and the president—and his successors—will manage to cut one-fifth of projected expenditures over the coming decade and balance the federal budget, but that’s a very tall order in the face of baby boomer retirements and soaring health costs. Reaching fiscal balance will take some combination of spending cuts and tax increases. What we don’t need is more tax cuts.

Last week the Congressional Budget Office quietly released its October Monthly Budget Review showing preliminary 2009 budget numbers. The $1.4 trillion deficit more than tripled the previous record of $459 billion set just last year (see top table). More than half of the increase was due to a $530 billion jump in outlays but 44 percent came from a 17 percent drop in revenues. That decline resulted in the federal government collecting a smaller share of taxes than at any time in the last half century.

A bit of the $420 billion decline came from tax cuts in the stimulus bill but six out of seven lost dollars were due to the recession. CBO estimated that the 2009 stimulus reduced revenues by $61 billion in 2009, almost the same as the $62 billion revenue loss from the 2008 tax rebates.

THE stimulus bill mostly cut individual income taxes. The Making Work Pay credit reduced wage withholding starting in April. The new homebuyer’s credit gave up to $8,000 to people claiming it on their 2008 returns. Most of the other cuts modified existing tax credits—the earned income tax credit, the child credit, and the education credit—and the bulk of their impact won’t come until beneficiaries file their 2009 tax returns next April. All told, the stimulus cuts accounted for only a little more than a quarter of the 20-percent drop in income tax revenue—$230 billion  (see bottom table).

Corporate income tax revenues took the biggest hit, down by more than half from 2008. The deep recession wreaked havoc on corporate profits, leaving a large majority of firms with no tax liability. The consequent $165 billion drop in corporate taxes accounted for nearly 40 percent of the total revenue decline.

Social insurance and other federal taxes suffered smaller hits—only about 2 percent, less than $25 billion in total.

Total federal revenue in 2009 amounted to just 14.9 percent of GDP, the smallest fraction since 1950 and far below the 26 percent of GDP spent by the federal government. That gap will narrow in coming years but CBO projects that it will average more than 4 percent of GDP over the next decade, and that’s only if the 2001-2006 tax cuts expire in 2011 as scheduled. Extending those cuts, even only for President Obama’s broad middle class, will mean deficits as far as the eye can see.

I’ve just spent 90 minutes listening to five Washington hands discuss “the financial and economic consequences of an exploding debt.” The prognosis, they agree, is grim. The chances of policymakers acting any time soon to address the looming fiscal crisis are remote. As one audience member asked the panelists during the Urban Institute discussion, “Which anti-depressant should I take?”   more »

Democrats are proposing to control future Medicare costs, and Republicans are trying to stop them. Who knew? This could have been the perfect “Nixon in China” moment. Democrats—who created Medicare and for decades resisted GOP moves to curb the program—control Congress and the White House. A Democratic President has embraced modest efforts to slow the program’s unsustainable rate of growth. Drug makers, doctors, and hospitals all swallow hard and buy into the idea. It could be the perfect moment for a bit of desperately needed fiscal responsibility.    more »

Both CBO and OMB put out their updated budget forecasts this morning. Getting past all the confusion about baselines, the news is grim. OMB projects more than $9 trillion in cumulative deficits over the next decade if the President’s agenda is enacted. A few things to keep in mind as you wade through the carnage.    more »

Rosanne Altshuler and I have argued in recent posts that Washington will be hard pressed to close our ongoing budget gap with politically palatable tax increases. (Is that an oxymoron?) Neither raising the individual income tax nor boosting corporate levies will erase the deficit. But what about the spending side of the budget? We at the Tax Policy Center naturally focus on taxes but we do understand that cutting a dollar of spending has pretty much the same effect on the deficit as raising another dollar in taxes.    more »

Yesterday my colleague Bob Williams blogged on how difficult it will be to dig ourselves out of our enormous budget hole. He examined CBO’s biennial Budget Options report, which contains a list of “revenue options” for modifying Federal taxes. Bob focused on the year with the smallest deficit over the ten year budget window which happens to be 2012. In that year, CBO predicts we will run a deficit of “only” $633 billion. The individual income tax raises the bulk of federal revenues, so naturally Bob looked at incremental reforms of those levies.    more »

Last week the Congressional Budget Office issued a new edition of Budget Options, its biennial publication detailing hundreds of proposals that would raise or lower taxes and spending. Numbers in the revenue chapter of the nearly-300-page book show just how difficult it will be to raise the taxes needed to fill the huge deficit hole that we’ve dug for ourselves.    more »

Way back in the last century, PAYGO rules in the 1990 Budget Enforcement Act (BEA) helped control spending and contributed significantly to four years of budget surplus. Since BEA expired after 2002, looser PAYGO rules have applied and Congress has repeatedly chosen to ignore them. That was easy since violating PAYGO could only trigger a point of order, which was pretty easy to overcome, at least in the House. The Senate requires 60 votes to beat back a point of order but senators got around that by putting tax cuts and spending increases in budget resolutions, which are not subject to points of order.    more »

Bill Gale and Alan Auerbach are nice guys, but they sure know how to ruin a beautiful summer day. I’ve spent the morning reading through their latest long-term budget forecast. It’s not even Noon and I think I need a drink. Gale, who is TPC’s co-director, and Auerbach, who heads the Burch Center for Tax Policy and Public Finance at Berkeley, have done this exercise for the past few years--each iteration more depressing than the last. The story this year: Long after the economy recovers and returns to full employment, long after the TARP and the auto bailouts are history, the U.S. will face massive and unsustainable deficits. Don’t let anyone tell you this is a temporary problem that will fade with the recession. It isn’t and it won’t.    more »

As I promised in last Friday’s TaxVox post, here is TPC’s estimate of the 2012 distribution of President Obama’s tax proposals in the 2009 budget, measured against the administration’s chosen baseline. That baseline looks a lot like current policy: extend the Bush tax cuts, index and make permanent the 2009 estate tax, and permanently patch the alternative minimum tax by indexing forward the 2009 parameters.    more »

Following last month’s release of the Treasury Green Book, the Tax Policy Center reworked its distributional analysis of the tax proposals in President Obama’s 2010 budget. We learned many new details about specific tax provisions, including the practical definition of who has enough income to face higher taxes. The bottom line? You have to have a lot of income to be in Obama’s crosshairs.    more »

Here we go again. I posted yesterday on a new TPC analysis of the tax cuts in President Obama’s proposed 2010 budget. The conclusion: Nearly everyone, even most of the very wealthy, would enjoy a big tax break. This, I suggested, was not smart, given the nation’s huge deficit and Obama’s ambitious priorities. Not surprisingly, a commenter—AMTbuff—called me to task. While many of these revenue provisions represent tax cuts relative to current law, they are not when compared to current policy—that is, assuming all the 2001 and 2003 tax cuts are made permanent, the AMT is patched into the future, etc. According to AMTbuff, “using current law as the baseline is misleading [since] neither the public nor any experts expect all tax rates to spring back to pre-2001 levels.”    more »

Everybody gets a tax cut! To look at TPC’s latest estimates of the tax provisions of President Obama’s 2010 budget, you’d think there was no deficit of $1.84 trillion, or that the White House has no need to pay for an ambitious health reform plan. Or more education spending. Or more infrastructure construction.    more »

Californians vote tomorrow on six ballot measures addressing their state's perennial budget problems. If nothing passes, California will face a $20 billion budget shortfall. If everything passes, the deficit drops to—drum roll, please—$15 billion. Big numbers but not unusual for the Golden State. The bigger issue is whether California, or any other state, should budget by initiative.    more »