From Red Carpet to Red Ink – The Emmy Awards last night celebrated the best in TV. In Washington, the plotlines are still being written for this fall, but fiscal issues are sure to get star treatment.

No “Glee” from S&P – A senior executive with rating agency Standard & Poor’s last week warned the U.S. that its AAA credit rating was at risk down the road if action is not taken to address mounting national debt. The official specifically mentioned that they would closely follow the recommendations of the White House fiscal commission later this year and how Congress reacts.

“Mad Men” (and Women) of CRFB Release Realistic Baselines – Last week CRFB released its Medium- and Long-Term Baselines, which forecast a bleak budget outlook based on realistic assumptions about future policy. CRFB calculates that, absent significant policy action to change course, debt will reach 75 percent of GDP in 2015, 89 percent in 2020, and 127 percent in 2030.

A “Modern Family” Get-Together in Jackson Hole – Economists and central bankers descended upon Jackson Hole, Wyoming for an annual economic symposium where monetary and fiscal policy were hot topics. In his address, Federal Reserve Chairman Ben Bernanke admitted that the U.S. economy was sluggish and that the Fed stood ready to make sure the recovery continued. European Central Bank President Jean-Claude Trichet told the gathering that now that the worst of the financial crisis is over, governments must aggressively reduce their debt. CRFB President Maya MacGuineas was there and talked to CNBC about fiscal policy and the need for a credible debt reduction plan.

Presidential Panel Seeks “Big Bang Theory” for Tax Reform – On Friday the President’s Economic Recovery Advisory Board submitted a report on tax reform options. The report offers several ideas for improving the tax code, along with pros and cons of each. Hopefully, the report will initiate a much-needed discussion on fundamental tax reform that modernizes the inefficient tax code and broadens the tax base.

Boehner Seeks to be “The Closer” – House Republican Leader John Boehner (R-OH) gave a much-publicized speech on the economy last week that is seen as a part of his effort to provide the closing campaign argument for control of the House of Representatives. He devoted significant time to fiscal policy in his remarks. Of particular importance were his statements on the need for tax reform. His acknowledgement that some tax breaks need to be reexamined and the tax code simplified are welcomed and could open the door for bipartisan reform.

Are Unemployment Numbers Still “Breaking Bad”? – Observers are eagerly awaiting the August unemployment report due Friday as an indicator of the strength of the recovery.

Today the President’s Economic Recovery Advisory Board issued a report on tax reform options. The report should encourage and inform a vital discussion on the need for fundamental tax reform and hopefully will broaden the current narrow debate over extending the 2001/2003 tax cuts.

PERAB was created by the president last year “to ensure the availability of independent, nonpartisan information, analysis, and advice as he formulates and implements his plans for economic recovery and enhancing the strength and competitiveness of the Nation’s economy.” It is chaired by former Federal Reserve chairman, and CRFB board member, Paul Volcker.

The report is in response to a request from President Obama to provide options for changing the tax system to achieve three goals: simplifying the tax system, improving taxpayer compliance with existing tax laws, and reforming the corporate tax system. The president stipulated that the options presented could not raise taxes on families earning less than $250,000. The panel took this as meaning that the options taken together had to be revenue neutral for this cohort.

The report does not make specific policy recommendations, but offers a detailed list of options with pros and cons for each. A multitude of options are offered, including simplifying tax filing; raising the standard deduction and reducing itemized deductions; simplifying or eliminating the AMT; broadening the corporate tax base; and eliminating or reducing tax expenditures.

Offering a detailed list and providing pros and cons of each option opens a much-needed conversation on improving the antiquated and inadequate tax code. Focusing on simplification and efficiency, closing the tax gap and corporate tax reform are important and must be part of the conversation. But the dialogue will also have to include broadening the tax base as part of larger efforts to reduce fiscal imbalances.

The section on tax expenditures is particularly insightful, stating,

Many of these provisions distort economic activity, increase the complexity of the tax code, and violate principles that businesses with similar characteristics should be treated equally. Eliminating specific expenditures would thus improve efficiency while simplifying the tax code.

Options discussed are eliminating the domestic production credit; eliminating or reducing accelerated depreciation; and eliminating special rules for employee stock ownership plans. In light of recent remarks from House Republican Leader John Boehner regarding tax expenditures, a genuine opportunity exists for action.

PERAB has provided policymakers with a good reference; now it is time for them to work together to fundamentally improve the tax code.

Today, CRFB released a new policy paper showing a more probable fiscal outlook over the coming decade than what baseline budget projections would predict. Late last week, CBO released its updated current law budget and economic assumptions. While current law projections show debt continuing to grow over the next ten years, it is highly likely that actual deficits and debt will be much worse over both the medium- and long-term.

Under current law, debt is projected to grow from 62 percent of GDP this year to 69 percent by 2020. However, this current law baseline assumes that a number of policies that are scheduled to expire actually actually do, when in all likelihood many of them will be extended. There are four main assumptions in current law projections that are unlikely to materialize and will push deficits and debt even higher:

• The 2001/2003 tax cuts will fully expire at the end of this year;
• Lawmakers will stop "patching" the Alternative Minimum Tax (AMT) to keep it from hitting middle-income earners;
• Medicare physician payments will fall by about 30 percent over the next few years;
• Discretionary spending will grow in line with inflation over the next ten year, declining as a share of GDP.

Incorporating these changes (and a few other small ones) on top of baseline deficits will drastically increase out borrowing needs over the medium- and long-term.

Under CRFB's Realistic Baseline, debt would reach 89 percent of GDP in 2020 - much higher than the 69 percent projected under current law.

CRFB also developed a more realistic long-term baseline (click here to read about all of our long-term assumptions). Instead of debt rising to 85 percent of GDP by 2040, to 94 percent by 2060, and to 114 percent by 2080 (note: long-term baseline figures adjusted by CRFB to include CBO's updated medium-term projections from last week), debt would rise to 127 percent of GDP by 2030, to 182 percent by 2040, and to 246 percent by 2050 under more realistic assumptions. Surely, no economy could ever sustain such enormous debt levels.

In the policy paper, CRFB argues that policymakers should decide which policies are most important to continue, and then they should offset the costs of whichever policies they keep.

If lawmakers extended various current policies, as opposed to letting them expire as they are set to under current law, what would happen to economic growth over the coming decade?

In its most recent Long Term Outlook, CBO presented an Alternative Fiscal Scenario (AFS) with current policies that are expected to be extended in the near future—the biggest component of which being a full extension of the 2001/2003 tax cuts. Other assumptions in the AFS include faster discretionary spending growth, AMT patches, and annual "doc fixes" to prevent scheduled cuts in Medicare payments to physicians. The effects of these policies on the alternative baseline show alarming spending growth and comparatively slower revenue growth in the long-run (click here to read our newest policy paper on more realistic medium- and long-term projections). As for their affect on economic growth, in the recent Budget Update CBO states:

"Under those alternative assumptions, real GDP would be higher in the first few years of the projection period but lower in subsequent years than under CBO’s baseline forecast."

So, despite the seemingly positive short-term effects on GDP that tax cuts and other policies may have, growth will be slower later on as a consequence—and federal debt would balloon to 185 percent of GDP by 2035. CBO reports that despite higher growth in the near-term:

"Over time, the negative consequences of very high federal borrowing build up....real GDP would fall below the level in CBO’s baseline projections later in the coming decade because the larger budget deficits would reduce or 'crowd out' investment in productive capital and result in a smaller capital stock."

Interest rates under the AFS would rise to nearly 4 percent of GDP by 2020 -- much higher than the current level of 1.4 percent. The AFS would also improve unemployment in the short-term, estimating that:

“[T]he unemployment rate would be lower by 0.3 to 0.8 percentage points at the end of 2011—that is, 8.0 percent to 8.5 percent.”

Focusing just on the tax cuts, CBO's newest estimates give us an idea just how costly it would be to extend all or parts of them over the coming decade. Since the debate in Washington has been centered on either extending them fully or for those earning less than $200,000 ($250,000 for couples), we have included those costs in the table below.

The cost of extending the 2001/2003 tax cuts for all but high earners (and even if they were fully extended) would be even larger if lawmakers continue patching the Alternative Minimum Tax (AMT)—in fact, almost $700 billion more over ten years—and this is very likely to occur. CBO estimates that the tax increases for all but high earners combined with AMT patches would result in $2.4 trillion more in deficits over 10 years, $2.7 trillion if just all the 2001/2003 tax cuts are extended, and a whopping $3.9 trillion more in deficits over 10 years if the AMT patch and all of the 2001/2003 tax cuts are extended.

Clearly, the larger projected debts must be taken into account in any policy debate on tax cut issue. More broadly (and as we argue in our newest policy paper), lawmakers should decide which policies are the most important for the country going forward, and then they should find way to pay for the policies they choose.

Yesterday, CBO released an update on the American Recovery and Reinvestment Act’s (read our analysis of it here) impact on unemployment and job growth for the second quarter of 2010. It reported that ARRA funded almost 750,000 jobs in the U.S. this quarter, yet this positive report was accompanied by the cautionary note that the number of jobs created cannot alone paint a picture of the bill’s impact, primarily because some of those jobs might have existed regardless of the stimulus.

CBO’s analysis says that the economic stimulus package raised real GDP by between 1.7 and 4.5 percent in the second quarter of 2010, while lowering the unemployment rate by between 0.7 and 1.8 percentage points (the range illustrates the inherent uncertainty in estimating the effects of the stimulus). CBO reports that, from its implementation through the second quarter of 2010, the ARRA increased the number of people employed by between 1.4 million and 3.3 million, and increased the number of full-time-equivalent jobs by 2.0 million to 4.8 million compared with what would have otherwise occurred. The chart below compares CBO's most recent findings with those of CEA, published a month ago.

^{*For CEA Employment Increases (millions) in Q3 2010 and Q4 2010, the numbers were derived from the CEA Report by taking note that they project 3.5 millions jobs to be created/saved by Q4 2010, and then splitting the difference between Q3 and Q4 2010 columns.}

However, CBO also warns that the ARRA’s effects on output will be gradually diminishing during the second half of 2010 and beyond, with its effects on unemployment lagging slightly behind, beginning a more noticeable decline in 2011.

The ARRA, signed into law in February 2009, included about $814 billion in spending and tax cuts over a ten year period (the latest number from CBO), among them a $400 per person "Making Work Pay" tax credit, a patch of the Alternative Minimum Tax, substantial infrastructure investment, an expansion of unemployment benefits, and significant state and local aid. Follow the bill's continued deficit impact at stimulus.org.