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Home Publications Blogs CEPR Blog CBO Says We Have a Tax Problem, Not a Spending Problem

CBO Says We Have a Tax Problem, Not a Spending Problem

Written by Nicole Woo   
Wednesday, 18 September 2013 12:13

Yesterday the non-partisan Congressional Budget Office (CBO) released its 2013 Long-Term Budget Outlook, and it has some great news. Specifically, CBO is predicting substantially lower health care spending this year and 25 years into the future. 

CBO states that it "now projects that federal spending for major health care programs would equal 8.0 percent of GDP in 2038 under current law, down from the previous projection of 8.7 percent." Specifically, "4.9 percent of GDP would be devoted to spending on Medicare... and 3.2 percent would be spent on Medicaid, CHIP, and the exchange subsidies."


Since increasing health care costs have long been considered one of the most intractable of our nation's future budget problems, CBO's new numbers should be cause for celebration.

On the other hand, CBO is projecting higher debt levels 25 years from now -- and finds that that it's mostly due to "sharply reduced" revenues going into government coffers:

The Congressional Budget Office (CBO) now projects that... federal debt held by the public would rise significantly in the next quarter century.... The very large change between this year and last year in projected federal debt stems primarily from changes in tax law that have sharply reduced future revenues.

CBO specifies that The American Taxpayer Relief Act of 2012 (which made permanent most of the Bush tax cuts and indexed the Alternative Minimum Tax to inflation) as the cause for the bulk of the decrease in taxes.  As a result, it lowers its estimates of federal revenues a portion of our economy:

Federal revenues... are now expected to be substantially lower in coming decades.... By 2023, revenues are projected to be 2.8 percent of GDP lower than projected in the 2012 analysis: 18.5 percent of GDP rather than 21.3 percent.... Revenues are now projected to equal 19.7 percent of GDP in 2038, 4.2 percentage points lower than the 23.9 percent figure projected last year.

By lowering its projections of future spending levels as well, CBO shows that we have a tax problem, not a spending problem:

Noninterest spending... in 2038 is projected to be 1.4 percent of GDP lower than in the 2012 analysis.... Total federal spending on everything other than major health care programs, Social Security, and net interest is now projected to equal a smaller share of GDP throughout the next 25 years than CBO projected last year.


In addition, CBO quantifies how high unemployment rates do damage to the economy (and, by extention, future debt levels):

CBO raised its projection of the unemployment rate over the long term from 5.0 percent to 5.3 percent.... That change in the long-term unemployment rate reduced CBO’s projection of the level of GDP by about 0.6 percent after 2027.

Skimming over yesterday's news reports on the 2013 Outlook, it seems that most of the coverage missed the good news about health care spending, as well as CBO's important point that higher future debt is mostly due to lower taxes, not out-of-control spending. 

That's a shame, as the public and policymakers need accurate information in order to make good decisions about our economy, now and in the future.

[CORRECTION, Sept. 23: An earlier version of this blog post cited the CBO estimate for federal health care spending in 25 years that was published in the 2012 Outlook, using an older methodology. In the 2013 Outlook, CBO explains, "In the 2012 report, Medicare premiums and other offsetting receipts paid to the federal government were included as part of other mandatory spending... the analysis of health care programs focused on gross Medicare outlays.  This year, CBO included those offsetting receipts in its calculations of Medicare spending, and the analysis of health care programs focuses on net Medicare outlays." Thanks to Josh Bivens of EPI for bringing this to my attention.]

Tags: budget | CBO | health care

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The Independent Moderate
written by Dave, September 26, 2013 5:48
Part one:

The problem with this report/story is that it rely's on estimates (rosy ones at that). Specifically, the supposed "great news" (lower healthcare costs and a generally better U.S. financial picture) are based on estimates of GDP. Obviously, if you increase projected GDP, the "percent of GDP" costs goes down. However, if you decrease projected GDP, that "percent of" figure would in fact increase. It's simple mathematics and it would be nice if that fact were specifically pointed out in the story. Not doing so allows a false sense of "great news" to be inferred from a simple "estimate" that can (and will) be changed as we move forward.
Could the eventual GDP actually be as good (or even better) than these current estimates? Of course, anything is "possible". However, if one simply examines the totality of issues going forward, it becomes exceedingly obvious that the odds favor a lower GDP than that predicted for this story. A few reasons for this are (1-7):

1) People being forced (due to a combination of factors) to work later in life- Adds to other reasons which will result in greater competition for fewer jobs (wage pressure) and perpetually high unemployment/underemployment rates.

2) Increased productivity and business efficiency's- Adds further pressure to unemployment rates as fewer people are needed in manufacturing and even many sales based businesses.

3) The looming student-loan-debt crisis- As graduates can't find jobs (or at least jobs commensurate with the debt incurred for their degrees).

4) Defined "contribution" replacing defined "benefit" retirement plans- Less "guaranteed" retirement income (defined benefit) = people being less willing to spend freely (due to the "unknown factor" of their yearly retirement income).

a) The "unknown factor" is from the perspective that people's retirement income will vary dramatically based on how they invested during their working years, how they invest during retirement, and that all important (and impossible to solve for) how long they will live (which impacts how fast the money can be used without running out...the scariest factor of all).

b) This issue is intensified by the fact that people (on avg) don't contribute enough (if at all) to their retirement plans. If they do, it's often later in life when they've lost a majority of the time required to take advantage of "compounded interest".

c) People are also (on avg) historically very bad investors who don't re-evaluate their investments. They also tend to invest "emotionally" which leads to selling due to fear (at low prices) and buying with enthusiasm during bull markets (at higher prices). Iow, buying high and selling low...the exact opposite of what is necessary for sufficient long term results.

5) Higher number of people on gov't assistance programs- The longer a person is exposed to a new paradigm (weather gov't assistance programs or being a politician) the easier it becomes to adapt to those new paradigms. Obviously there are exceptions (where people will do "everything possible" to get off gov't assistance programs), but far too many people are not willing to sacrifice now for future reward. Rather, they want things now (immediate gratification) and refuse to sacrifice things like cable TV, gaming systems, a newer car, eating/going out, expensive electronic gadgets, etc. for that future reward of a better job and having retirement "savings". Rather, they "get by", complain about it, refuse to sacrifice the a fore mentioned things, and plan to rely on social security and other gov't programs.

6) Failing pension plans and state debt- Desired bailouts will put further pressure on the financial status of the U.S. as further deficit spending will be required if these failing states are to be bailed out. Not all will be. The uncertainty generated by these collapses will add to the retirement uncertainties discussed in #4 above.

** All words, ideas, thoughts, inferences, and conclusions are the sole property of the author. Any reproduction (partial or otherwise) must come with the permission of the author. Thank you.
written by Dave, September 26, 2013 5:55
Part two:

7) Higher taxes- Inevitably, the federal gov't will feel as if there is no option but to raise taxes to pay for many of the items listed above. Doing so will only aggravate the problem as it will serve to take even more money out of the economy and thus, GDP.

8) Numerous factors above will show that the CBO's ridiculous long term unemployment estimate of 5.3% (up from 5%) is too low and will further counter their rosy outlook. We'll be lucky to remain above 6% consistently. Btw, we need to be talking about the "real rate" (i.e. including those who've quit looking and incorporating comparable workforce participation rates into the computation) in order to get a more realistic and truly meaningful figure.

Summary: More people desiring to be in the workforce, increased productivity and business efficiency's, higher unemployment/underemployment, a looming student loan debt crisis, less "guaranteed/reliable" (defined benefit) retirement income, higher gov't assistance participation, failing pension plans, and inevitable higher taxes......all add up to less money to put "into" the economy. Less money in the economy means a lower future GDP than what's being "estimated" for articles like this. It's the inconvenient truth not being discussed by people who primarily plan/act/legislate in an emotionally "reactive" vs. critical thinking "proactive" manner...


Feel free to contact me irt any topics within or related to the ideas expressed here. Have a nice day.

** All words, ideas, thoughts, inferences, and conclusions are the sole property of the author. Any reproduction (partial or otherwise) must come with the permission of the author. Thank you.

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