The Bottom Line

August 29, 2014

CBO's recent budget projections reaffirm that our debt problems are significant. Entitlements are projected to grow, as a result of a retiring population and increased health care costs. Revenues are not projected to keep pace, leaving the budget with ever-growing deficits and increasing interest payments. By 2024, annual deficits will reach almost $1 trillion.

August 28, 2014

CBO's latest budget projections, while a slight improvement, are not good news for the country's fiscal future. Debt is higher than at any time in our country's history other than World War II, will rise to 77 percent of GDP by the end the decade and continue to climb thereafter.

August 28, 2014
Good Deeds Punished as Crossroads Dings Dems on Debt Plan

Maya MacGuineas, President of the Committee for a Responsible Budget, wrote a commentary that appeared in the Wall Street Journal Washington Wire. It is reposted here.

August 27, 2014

Moments ago, CRFB published a new 6-page paper summarizing CBO’s latest Budget and Economic Outlook. Under its current law baseline, CBO estimates that federal debt held by the public will reach 74 percent of GDP by the end of 2014 – a post-war record and more than twice the level at the end of 2007.

August 27, 2014

The Congressional Budget Office (CBO) just released its August baseline, updating budget projections from April and economic projections from February. In short, CBO continues to show debt on an unsustainable path, rising continuously as a percent of GDP after 2018.

August 26, 2014
Congress Must Act to Get the Economy Back on Track

Maya MacGuineas, President of the Committee for a Responsible Budget, wrote a commentary that appeared in the Wall Street Journal Washington Wire. It is reposted here.

A few years back, Federal Reserve Chairman Ben Bernanke gave a speech at the annual Fed gathering in Jackson Hole, Wyo., that devoted a good deal of attention to U.S. fiscal policy.

The speech was important not only because it was on target – Mr. Bernanke recommended reforming U.S. tax and spending policies in a gradual way to control the debt without creating “fiscal headwinds” on the recovery (translation: a Simpson-Bowles-like plan) – but also because he stepped beyond the world of pure monetary policy to address legislative issues. This only made sense since the economic recovery so clearly depended on both rational Fed and fiscal policies. Even then, Mr. Bernanke held back from being overly prescriptive because there is such strong a firewall between policies from the Fed and those on Capitol Hill.

It seems likely that as Fed Chairwoman Janet Yellen gave her keynote address at Jackson Hole last week focused on labor markets, she, too, would have liked to be able to give lawmakers a gentle nudge—or a shove—in the right direction.

August 26, 2014

The Congressional Budget Office (CBO) is set to update its budget and economic projections tomorrow, laying out the fiscal picture for the next ten years. We already know that the FY 2014 deficit is likely to be around $500 billion, close to where CBO had it in their last budget forecast in April. With ten months having been completed in the fiscal year, we can see how the actual data compares to their April forecast by seeing how growth in various programs and revenue sources has come in compared to CBO's expectations. While this exercise won't necessarily show the full picture of what will happen to CBO's outlook for the next ten years, it could illustrate areas where current year data may lead CBO to revise their estimates.

Overall, both spending and revenue through the first ten months of the fiscal year have grown slower than CBO expected. Revenue has fallen shorter of expectations than spending though, meaning that if these growth rates held up through the end of the year, the 2014 deficit would be about $15 billion higher than CBO predicted. Below the table, we look in depth at a few of the specific categories of spending and revenue that so far have differed from CBO's forecast.

August 22, 2014

Many policymakers have expressed concern about "tax inversions," transactions where American companies move their headquarters overseas in order to pay a lower tax rate. The inversions are estimated to cost about $20 billion in lost corporate tax revenue over the next ten years. Yet even as Congress and the Administration debate whether to stop inversions, there is bipartisan agreement on a series of tax breaks that could cost 35 times more. Reviving the tax extenders continually over the next 10 years will cost about $700 billion (about $400 billion in corporate tax breaks, and about $300 billion for other businesses and individuals).

Since the beginning of the year, at least 14 companies have announced mergers or purchases of overseas companies that would result in an American headquarters moving overseas. Commonly called "tax inversions," these transactions often take place only on paper – no offices or employees move, but the company is considered foreign for tax reasons. By inverting, companies avoid the U.S. corporate tax rate of 35 percent on their overseas earnings, instead paying a much lower (or sometimes zero percent) rate that other countries charge on income outside their borders. This erosion of the corporate tax base is problematic, and there's several ways to address it. One suggestion, by CRFB President Maya MacGuineas, calls for a strategic pause where companies agree not to invert for nine months, paired with a fast-track procedure to encourage comprehensive tax reform.

Inversions are estimated to cost about $20 billion in lost tax revenue over the next 10 years, or about 0.5% of the $4.5 trillion that will be paid in corporate taxes during the same period. Legislation stopping them would raise enough to pay for about one-quarter of the $85 billion cost of continuing the extenders for two years, as the Senate Finance Committee would do. But the extenders have often been extended year-after-year. For example, the current Finance Committee bill continues 52 out of 54 provisions, and expands some tax breaks that were not in the original bill. If the package were continually extended, the provisions would cost $700 billion. (The House, on the other hand, has taken a much more expensive approach, expanding the package to cost over $1 trillion.)

August 21, 2014

The Postal Service has been losing money in recent years and has needed to cut back on services and raise stamp prices. However, these latest reductions are setting off a squabble among lawmakers. After USPS announced plans to consolidate 82 mail processing centers in 2015 and shed 15,000 jobs, 50 mostly Democratic senators sent a letter to the Senate Appropriations Committee and Financial Services and General Government Subcommittee chairs and ranking members asking them to postpone the reductions for one year and return mail delivery standards back to where they were in July 2012 to buy time for postal reform. Senate Homeland Security and Government Committee Chairman Tom Carper (D-DE) responded with a statement arguing that the best way to address these concerns would be for Congress to enact reforms to fix the financial challenges facing the Postal Service. But are lawmakers close to an agreement?

The answer is unclear. Both the House and Senate have produced bills with similar elements, but they have different emphases when it comes to stemming USPS's flow of red ink.

August 21, 2014

The Bipartisan Policy Center's Health Project has kicked off a series of white papers on overcoming the obstacles to delivery system reform with an overview of the opportunities and challenges for reform, over a year after producing a comprehensive health care reform proposal.

August 20, 2014
Congress irresponsibly takes ‘pension smoothing’ from exception to habit

The Washington Post editorial board came out today criticizing the use of gimmicks, saying the recent use of pension smoothing was a new low in terms of fiscal irresponsibility. Pension smoothing was recently passed as part of an 8-month patch to the Highway Trust Fund, which will now have enough funds to pay for federal transportation projects through next May.

Pension smoothing raises money in the short term by reducing the amount of money that companies are required to put into their defined-benefit pension plans. Since companies can claim a tax deduction for pension contributions, making fewer contributions means paying higher taxes.  But over the long term, companies will need to replace those lost pension contributions, reducing revenue in the future. In the meantime, more companies will have underfunded or bankrupt pensions. This provision has been criticized from all sides as not actually reducing the deficit.

The editorial board criticized the fact that pension smoothing has become a normal provision used to pay for highways rather than a one-off policy. The bill extended pension smoothing for five years, which provided most of the savings to pay for the 8-month highway extension.

We call this a new low in fiscal irresponsibility not because pension smoothing has never been used as a “pay-for” previously. In fact, the bill Mr. Obama signed actually extends, by 10 months, a pension-smoothing provision that helped “fund” the two-year highway bill that preceded this one. But that is precisely the point: Pension smoothing has just crossed the line between exception and habit. Once a bit of an embarrassment, even to Congress, it’s becoming normalized.

August 19, 2014

Social Security is often portrayed in one of two ways, either as its own self-contained program (the “trust fund perspective”) or as part of the broader budget (“the unified budget perspective”). Although focusing on these two lenses is sensible, the reality is more complicated; especially when it comes to the role of general revenue. Even though Social Security is mainly funded by a 12.4 percent payroll tax, general revenue comes into play even under the trust fund perspective. Indeed, since 1965, over $2.5 trillion ($3.1 trillion in today's dollars) of the $20 trillion of income received by the Social Security Trust Funds has come from sources other than the payroll tax, representing 12 percent of the total.

There are three main ways that general revenue has directly or indirectly made its way into the Social Security Trust Funds:

  • Direct transfers from the General Fund: The general fund has occasionally reimbursed the Social Security Trust Funds in specific cases to compensate it for policy changes that would otherwise lower its balance. Most recently, Congress passed a payroll tax cut for 2011 and 2012, lowering the payroll tax rate by 2 percentage points to stimulate the economy but authorizing a general fund transfer so the Social Security Trust Funds would be no worse off. The holiday was responsible for $225 billion of transfers. Congress has also used general fund transfers to pay for extra benefit credits to active-duty military between 1957 and 2001, special age-72 benefits for people not covered by the program by 1968, a payroll tax credit in 1984, and other reasons. Overall, nearly $260 billion has been transferred from the General Fund since 1965, or $300 billion in today's dollars.
  • Taxation of Benefits: Since 1983, retirees with significant income from sources other than Social Security have paid income tax on a portion of their Social Security benefits (prior to that, benefits were tax-free for everyone). Although this money is paid via the income tax, it is credited back to the Social Security Trust Funds. Since 1983, $370 billion has been transferred from the General Fund due to the taxation of benefits, or $440 billion in today's dollars.
  • Interest paid on Social Security bonds: The Social Security Trust Funds currently contain $2.8 trillion of assets, mainly as a result of significant surpluses in the 1990s and 2000s. That money is invested in U.S. Treasury bonds, which earn interest paid from general revenue. The trust funds earned about $100 billion of interest last year and have earned about $1.9 trillion since 1965, or $2.3 trillion in today's dollars.
August 18, 2014

On August 15, PublicSquare.net hosted a debate on Social Security featuring CRFB's very own Ed Lorenzen. The event, titled "Can Simpson-Bowles Save Social Security?" involved Benjamin Veghte, Research Director at Social Security Works, and Lorenzen, a Senior Advisor at CRFB who served on the National Commission on Fiscal Responsibility and Reform that was chaired by Erskine Bowles and Al Simpson. The debate was moderated by Taylor Kinzler.

August 15, 2014

The use of supplemental appropriations got some press last month as the Obama Administration requested $4.3 billion to address the Central American migrant crisis and fight wildfires. Although neither funding measure passed, it showed the role that supplementals continue to play in the appropriations process. Lawmakers use supplemental appropriations to respond to needs that they did not foresee when they passed government funding measures. To see how much activity has taken place outside of the "regular" process, CBO has helpfully recapped in a new report total supplemental appropriations since 2000 (see the data in Excel here). They break down spending by year and type, showing both the amounts that have been requested and what ultimately was passed into law.

Overall, Presidential administrations have requested $1 trillion over the past 15 fiscal years, and Congress has enacted $1.1 trillion of appropriations ($1.15 trillion of gross spending net of $50 billion in rescissions of past authorized spending). The enacted amount is equal to 0.5 percent of GDP over that period, and it peaked at 1.3 percent ($191 billion) in 2009 when war spending was near its peak; by contrast, there was no supplemental spending in 2011 and 2012 and only $225 million so far in 2014. Including interest brings total spending to $1.4 trillion, or 0.7 percent of GDP.

August 14, 2014

It was on this day 79 years ago that President Franklin Roosevelt signed into law the Social Security Act of 1935. While lawmakers have expanded the program since 1935 and changed it in many ways, the Social Security system still protects Americans against the “vicissitudes of modern life.” Social Security is the flagship program of social insurance in the United States.

It’s no secret that Social Security faces serious long-term funding challenges, as the latest report from the program's very own trustees highlights. If no action is taken, all benefits are set to drop by 23 percent in 2033, when all the programs assets would dry up, and disability benefits are on course to drop by almost one-fifth by 2016 when the Disability Insurance trust fund goes dry. It is critical that lawmakers address the gap between Social Security spending and revenues so the program can enjoy another 79 years (and more) of providing full benefits to retired workers, disabled workers, spouses, and any surviving family members. And the longer we wait, the more difficult solutions will become.

Luckily, CRFB has an incredible interactive tool to get lawmakers and the public started on picking and choosing from many reform options to set the program on a sustainable path: CRFB’s Social Security Reformer.

August 14, 2014
The Long-Term Answer to Inversions? Tax Reform.

Maya MacGuineas, President of the Committee for a Responsible Budget, wrote a commentary that appeared in the Wall Street Journal Washington Wire two weeks ago. It is reposted here.

 

August 13, 2014

In an op-ed that appeared in several papers, including the Providence Journal, CRFB President Maya MacGuineas dispelled five myths about Social Security that are often brought up in the debate about the program (and have been revisited with the release of the Trustees' Report).

August 12, 2014

In a New York Times article describing Republican plans if they re-take Congress next year, reporter Carl Hulse cited CRFB, saying that "balancing the budget without new revenue would require more than $5 trillion in reductions over a decade." Below, we explain our numbers and show the various ways to balance the budget within a decade.

Using CBO's baseline with a war drawdown, we estimate that there would be a deficit of 3.7 percent of GDP, or $1 trillion, in 2025. Balancing the budget in that year would require 2025 savings equal to that amount, but the path of savings has a great influence on how much in cuts must be made over ten years due to accumulated interest savings.

August 12, 2014

Both the Government Accountability Office (GAO) and Senator Tom Coburn's (R-OK) office have released new reports on a tax credit that rewards banks for investing in low-income communities. Both reports raise questions about whether the money is being used as effectively as it could be. The GAO report raises some concern with the credit's complexity and effectiveness, finding certain cases where investors are receiving many sources of federal money for the same project. Senator Coburn's report goes farther, identifying several places where the credit has been used for questionable purposes and calling for the credit's elimination. As his report explains:

The federal New Markets Tax Credit program was created to steer taxpayers dollars into banks that would in turn funnel financial assistance to businesses and developers in low-income communities to help create jobs. Yet, virtually every neighborhood, from Beverly Hills to the Hamptons, could qualify for the program. The New Markets Tax Credit (NMTC) has subsidized wealthy investors in nearly 4,000 projects, including car washes, bowling [alleys], parking lots and breweries. Many of these are wasteful and not a federal priority – such as an ice skating rink and a car museum - while others are corporations in little need of taxpayers’ handouts – such as chain restaurants like Subway and IHOP.

Since 2000, the New Markets Tax Credit (NMTC) has given investors, mostly large banks and financial institutions, a 39 percent credit for loaning money to businesses in low-income communities. Investors claim the credit over seven years.

GAO notes the financial arrangements used to claim the credit have become much more complex.

August 12, 2014
We've got to fix Social Security

Maya MacGuineas, President of the Committee for a Responsible Budget, wrote an op-ed distributed via McCatchy wire service that appeared in several papers around the county, including today's Providence Journal. It is reposted here.

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