The Bottom Line
In an op-ed in the Cleveland Plain Dealer yesterday, former Senator George Voinovich (R-OH) criticized the current Congress not just for the ongoing government shutdown but more broadly for the dysfunction of the budget process in recent years. He points out that a concurrent budget resolution has not been passed in four years, and lawmakers have relied increasingly in recent years on continuing resolutions (CRs), which is a poor way to allocate funds.
These “CRs,” as they are called, are a cop-out by our elected officials and a dereliction of one of Congress’s most sacred duties.
In fact, I felt so strongly about the negative impact of the CRs that, as ranking member on the Senate Subcommittee on Oversight of Government Management, the Federal Workforce, and the District of Columbia, I asked the Government Accountability Office (GAO) to investigate the detriment CRs had on our federal government.
GAO completed its report in September 2009, and its findings were startling. Beyond the uncertainty the CRs created, they also resulted in delays to federal contracts and grant applications, some of which were responsible for updating our prison system and Veterans Affairs hospitals.
Additionally, GAO found that each CR that was passed caused federal agencies to waste hundreds of hours on administrative tasks, like issuing and re-issuing short-term contracts, rather than on core agency missions.
Of course, the ultimate failure of the budget process has been realized in the form of a shutdown, which has now been going on for a week. This failure, Voinovich argues, brings into question the fairness of Members of Congress continuing to get paid, while many federal employees may wait weeks to receive paychecks.
Quite simply, the actions of this Congress are cutting its own legs out from under it, all while members of Congress continue to receive their paychecks from the taxpayers.
It is criminal that after forcing these continual debt debacles on the American people, members of Congress are still able to cash their paychecks. It is unjust and unconscionable that Congress should continue getting paid while hard-working federal employees such as FBI and DEA agents, border patrol agents, National Park Service employees and other federal workers are either being furloughed or given IOUs on their paychecks.
We've been saying for months now that lawmakers should act quickly to resolve this fiscal hurdles so they can turn their attention to passing a comprehensive deal that would include entitlement and tax reform. Writes Voinovich:
The American people deserve better than they are getting from Washington. I will continue to hope and pray that our elected officials – OUR Congress – can come together, pass a budget, and begin anew to instill the confidence in our elected officials that once existed. The future of our nation depends on it.
Click here to read the full op-ed.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.
On Day 7 of the government shutdown, it is not surprising that we are talking about a "leadership deficit" as much as the federal deficit. While there are many options on the table that will help reduce our debt and deficits, lawmakers in Congress must first embrace these proposals, especially ones with bipartisan support.
CRFB board member and former Congressman Tim Penny (D-MN) and former gubernatorial candidate Tom Horner write in this weekend's Star Tribune that the bitterness in Washington right now is disappointing for those who care about fiscal responsibility, as too often we only hear about the partisan issues. However, there is some hope given the work of third party advocates that just want to see the country move forward. They write:
One of the great strengths of our country is the balance of power shared by families, government, businesses and nonprofits, including the faith community. When one of these institutions is failing, we should look for leadership elsewhere. Business organizations can start by no longer echoing the Republicans’ no-new-taxes mantra. Instead, they can lead on comprehensive tax reform. Sen. Mike Lee, R-Utah, has proposed a tax overhaul that would promote investment and reward people for working. Among other features, Lee offers a $2,500-per-child tax credit against either income or payroll taxes (Medicare and Social Security) owed by a working family. The proposal recognizes that those in Mitt Romney’s 47 percent still pay significant federal taxes even if they owe no income taxes. More than that, it recognizes that we can no longer pay lip service to the importance of strong families. We need to invest in the ability of families to succeed.
Lee’s proposal is far from perfect, but it’s a good start. The revenue calculations still are being done, but it’s likely that some taxes will be increased in order to reduce others. Some business leaders (particularly those active in the Fix the Debt campaign) have embraced tax reform principles similar to those embodied in the Lee plan. We need their strong voices and the voices of other businesspeople to lead the discussion. Otherwise, we are left to the context created by Grover Norquist and other antitax crusaders.
Similarly, let’s ask organized labor to step forward to propose new ways to address the spending side of the federal budget, starting with health care. Obamacare on its own doesn’t solve the health care crisis. It promotes broader access but offers little cost control. However, throwing it out without an alternative — as Republicans have tried to do — is the wrong approach. And, asking for an exemption, as unions have done, is also wrongheaded.
The groundwork for a labor-inspired health care solution might be in a statement four years ago issued jointly by the leaders of the Service Employees International Union and Wal-Mart, Inc. Their 2009 letter to President Obama made the case for expanding access, including an employer mandate that doesn’t act as a barrier to hiring entry-level workers. Significantly, the letter also argues for the importance of controlling health costs, rightly asserting that “health care reform without controlling costs is no reform at all.
Penny and Horner assign most of the credit for ideas like the ones above to outside organizations, though they believe Congress will eventually find its way on this matter. But who deserves recognition is a secondary matter; we need a comprehensive deal to put the federal budget on a sustainable path and it will ultimately take sacrifices from everyone to get there.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.
Previously, we've voiced a number of concerns about sequestration, including that it is too abrupt, too mindless, too focused on the discretionary budget, and does nothing to improve the long term. What we've failed to mention, however, is that the sequestration also provides far less deficit reduction than what the Super Committee it was meant to back up was charged with saving.
From 2012 through 2021, the Super Committee was charged with identifying $1.5 trillion of deficit reduction, whereas the sequester would save only $1.0 trillion over that time period.
Recall that the Budget Control Act established the Joint Select Committee on Deficit Reduction (the so-called Super Committee) and established that "the goal of the joint committee shall be to reduce the deficit by at least $1,500,000,000,000 over the period of fiscal years 2012 to 2021." The enforcement mechanism to encourage a deal was the across-the-board sequestration currently in effect. Yet that mechanism only saves about two-thirds as much as the Super Committee's $1.5 trillion target over that same period.
So what explains the $500 billion difference between the savings target and what was achieved by the sequester in light of the Super Committee's failure? We identify five main reasons for the difference:
- While the Super Committee goal was to save $1.5 trillion, only $1.2 trillion was needed to fully waive the sequester. The additional $300 billion, had it been achieved, would have allowed for a further increase in the debt ceiling beyond the $2.1 trillion that was already allowed.
- The sequester was meant to save $1.2 trillion total based on a calculation which assumed interest was 18 percent of the total amount. Since the BCA passed, however, CBO's interest rate projections have fallen and interest savings have declined in turn.
- The sequestration cuts "budget authority" (BA), which is the amount appropriated to be spent each year. These funds are not all spent in the year they are appropriated thus resulting in ten-year "outlays," which is the number that actual counts for budgetary effect, lower than ten-year BA.
- Original calculations of the sequester did not account for the fact that there are some interactions with the sequester that end up reducing it's effect. For example, the automatic cuts in Medicare provider payments also result in lower premiums, since premiums are linked to the program's total spending.
- When Congress delayed by two months and reduced the size of the sequester in the fiscal cliff deal, they paid for half of that change with a budget gimmick that allows more people to convert their 401(k) accounts to Roth accounts in order to pay more taxes now but less later.
Together, these factors work to reduce the effect of the sequester down to only two-thirds the size of the Super Committee's savings target.
|Bridge From $1.5 Trillion to $1 Trillion|
|2012-2021 Savings (billions)|
|Super Committee Target||$1,500|
|Intended Difference Between Target and Sequester||-$300|
|Changes in Interest Rates||-$60|
|BA to Outlay Differences||-$80|
|Mandatory Spending Interactions||-$35|
|Roth Conversion Gimmick||-$15|
Source: CBO, CRFB calculations
Note: Lines include interest as a result of the change where appropriate.
In other words, in August of 2011 Congress and the President agreed that they needed to save 150 percent as much as what they will actually save on our current course.
And if policymakers did replace the sequester with 150 percent of the savings, it would go a long way towards improving our long-term fiscal problems.
As Congress negotiates a proposal to pass a continuing resolution and reopen the government, they may enact other policy at the same time. One such proposal was offered by the House Republicans on the eve of the shutdown, to permanently repeal the medical device tax and delay other aspects of the Affordable Care Act. At the time, CRFB President Maya MacGuineas criticized them for putting forward a proposal that would increase the deficit, making the problem worse. At the very least, any additional costs should be offset with savings elsewhere in the budget, so the fiscal situation will be no worse than before the showdown.
There has been bipartisan talk of Congress reconsidering repeal of the tax on medical devices. We're encouraged that this time, there is a discussion about searching for ways to offset the $30 billion cost. However, as lawmakers consider proposals, they should be wary of budget gimmicks filled with short-term revenue that makes our long-term budget situation worse. We're concerned about reports that lawmakers were considering an change to pension funds as an offset that we've previously described as a gimmick because it only raises revenue in the first few years, costs money in subsequent years, and increases pension liabilities.
If lawmakers want to repeal the medical device tax, they should find a legitimate way to offset the costs. We mentioned previously that a policy of bundling payments for certain inpatient procedures — making one payment to both physicians and the hospital for a given procedure — would provide sufficient savings and would get much of its savings from the same place, medical devices, in a smarter way. Whether policymakers use this policy or find another, it should be one that generates actual long-term savings.
Congress needs to find a way to end this government shutdown, but there are far better options. We're encouraged by reports of bipartisan conversations, which will be the only way to move forward. The dialogue about funding the government should be focused on ending the shutdown, dealing with the sequester, and a method for turning to our larger budgetary challenges. That means finding ways to reduce the long-term deficit, not ways to increase it.
This is the tenth post in our blog series, The Tax Break-Down, which will analyze and review tax breaks under discussion as part of tax reform. Last week, we wrote about individual retirement accounts used for retirement planning.
The American Opportunity Tax Credit (AOTC) was enacted as part of the 2009 stimulus legislation and replaced an existing tax credit for college students called the Hope credit. The AOTC enables undergraduate students or their parents to claim up to $10,000 in tax credits for education expenses over four years.
The American Opportunity Tax Credit allows parents or children to claim a tax credit for education expenses – like tuition or course materials – during the first four years of college. The taxpayer can claim 100% credit for the first $2,000 spent, and 25% credit for the next $2,000 spent, for a total credit of $2,500 per year. Up to 40% of the credit ($1,000) is refundable for taxpayers who have no income tax liability. The AOTC also phases out for single taxpayers making between $80,000 and $90,000 and joint filers making between $160,000 and $180,000.
Under current law, the AOTC will expire in 2017 and revert back to the Hope credit, which had been available since 1998. The Hope credit is non-refundable and only available for the first two years of college. It would also provide a smaller subsidy ($1,800) and starts phasing out at a lower threshold of $57,000/$107,000 (single/joint filer).
Taxpayers can only claim one of three education benefits, although the AOTC is the most generous tax benefit for people who qualify. Taxpayers can also choose the Lifetime Learning Credit (which is smaller, but available beyond the first 4 years of post-secondary school education) or the tuition and fees deduction (which is less valuable, but available to high-income taxpayers who do not qualify for the other credits).
How Much Does It Cost?
According to the Joint Committee on Taxation (JCT), all education credits combined will cost $20 billion in lost income tax revenue in 2013, or over $125 billion over the next five years. OMB provides an estimate for just the American Opportunity Tax Credit of $14 billion this year. Slightly under half of the credit’s cost is the refundable portion given to individuals with no income tax liability.
According to the Tax Foundation, repealing all education tax credits would provide enough revenue for a 0.9 percent across-the-board rate cut (the 39.6 percent rate would become 39.2 percent)
Source: Office of Management and Budget, 2013
If the current provisions were extended permanently instead of expiring in 2017, the AOTC would cost an additional $11 billion per year starting in 2018, or $58 billion through 2023, according to the President’s Budget.
Who Does It Affect?
Because the AOTC is refundable and phases out for higher income individuals, its benefits are spread relatively evenly across taxpayer income levels. By comparison, the Hope credit offered a benefit much more concentrated on middle-class taxpayers. Only about a quarter of the recipients of the AOTC have incomes over $75,000, and 16% have incomes over $100,000. The AOTC can either be based on a student’s income, or that of their parents, depending on who pays tuition and claims the credit. Students claiming the credit can create a very misleading perception of the income distribution, since young people make (and spend) less and get income from sources not often reported on tax returns, like gifts.
As we’ve written before, education tax preferences are nearly as large as Pell Grants, and these tax preferences comprise half of non-loan student aid. Benefits from Pell Grants are targeted to low-income households, while the tuition and fees deduction is the least progressive of these education subsidies with 50 percent going to households making over $100,000. The AOTC’s benefit also accrues more to higher-income households than Pell Grants, which can be seen clearer in the below graph that groups taxpayers by income levels, instead of lumped into larger quintiles as above.
What are the Arguments For and Against the American Opportunity Tax Credit?
Proponents argue that the American Opportunity Tax Credit provides financial assistance for college students struggling with the rising cost of tuition. Particularly in its expanded form, the AOTC better helps students who are lower in the income distribution than the Hope credit, and was responsible for a 90 percent increase in tax incentives for education in 2009. Proponents say that expanding the credit to cover third and fourth year students will make it easier for them to stay in school. A study predating the AOTC found that federal aid creates a small persistence effect, encouraging students to stay in school.
Opponents argue that the AOTC does nothing to encourage college attendance; rather, it is a windfall to students who planned to attend college anyway. The credit may help students with college costs, but it comes with a lag of up to 15 months, and the student likely would have already taken out loans to pay for college. Further, they argue that the credit is not well-targeted, since credits given to upper-income students could be better targeted to poor families. They argue that the complicated system of three different tax credits, various deductions for tuition expenses, and tax benefits given to universities should be dramatically simplified. Finally, federal subsidies for education may drive up the cost of tuition, either at all universities or only for-profit universities.
What Are the Options For Reform?
|Revenue from Options to Reform the American Opportunity Tax Credit (billions, 2014-2023)|
|Policy||Current Law||Current Policy
|Extend AOTC past 2017||- $60||$0|
|Extend the AOTC and index it for inflation||- $75||- $15|
|Repeal the AOTC, but leave the Hope credit in place||$100||$160|
|Repeal the AOTC, Hope, and Lifetime Learning credits, and gradually eliminate the interest deduction||$155||$215|
|Limit the AOTC to those below 500% of poverty, extend it, and eliminate other education tax benefits||$25||$85|
|Streamline all education benefits into a single credit, as proposed by Wyden-Gregg||$60||$120|
|Repeal all education preferences except the AOTC||$200||$140|
|Increase the AOTC’s refundability to 60%||- $10||- $15|
*All estimates are CRFB calculations based on available estimates.
What Have Other Plans Done?
President Obama’s budget and the Senate Budget Resolution would make the AOTC permanent, extending it past 2017. Numerous other proposals would reform, consolidate, or eliminate education tax credits. The New America Foundation’s plan for education reform would eliminate all tuition tax benefits and re-direct the money to Pell Grants. The Institute for College Access and Success recommends eliminating higher education tax provisions as well, instead funneling the money into Pell Grants and incentive funds.
Many plans would streamline various education credits into one provision: Senators Wyden and Coats would create a single nonrefundable credit. Sen. Rubio and Rep. Schock would eliminate other tax incentives in favor of a version of the AOTC targeted towards low- and middle- income families. Both the National Community Tax Coalition and the American Institute of CPAs propose a simplified credit. The Heritage Foundation would create a single tuition deduction, up to the value of the average cost of college.
The Center for Law and Social Policy published recommendations that would reform the AOTC and other educational credits, simplifying tax credits and front-loading refundability so students get the credit when they pay tuition instead of much later.
Both the Simpson-Bowles and Domenici-Rivlin plans did not include the American Opportunity Tax Credit on the short list of tax expenditures that they would keep, choosing to repeal it in favor of lower rates and higher revenue.
Where Can I Read More?
- Congressional Research Service - The American Opportunity Tax Credit: Overview, Analysis, and Policy Options
- Tax Policy Center – “American Opportunity” Tax Credit
- Committee for a Responsible Federal Budget – Tax Expenditures for Higher Education Rival Spending on Pell Grants
- Internal Revenue Service – Tax Benefits for Education: Information Center
- Susan Dynarski – Testimony before the Senate Finance Committee
- Scott Hodge – Are Tax Credits the Proper Tool for Making Higher Education More Affordable?
- CLASP – Reforming Student Aid: How To Simplify Tax Aid and Use Performance Metrics to Improve College Choices and Competition
- Congressional Budget Office – Higher Education Tax Credits
* * * * *
The American Opportunity Tax Credit is an expanded tax credit for undergraduate tuition expenses. It helps students and their families in most income ranges, providing up to $2,500 per student per year. However, critics complain that the AOTC does not change the number of people who go to college—it only subsidizes those who would go anyway. Some education reformers would eliminate the AOTC in favor of more funding for Pell Grants, which are targeted more heavily to low-income families and provide aid when the tuition bill comes due instead of 15 months later. Many tax reform plans have offered suggestions to consolidate and simplify the many tax preferences for higher education, in some cases incorporating features to better help students attend college without contributing to the rising cost of tuition.
Read more posts in The Tax Break-Down here.
Today marks the centennial anniversary of the federal income tax, signed into law on October 3, 1913 by President Woodrow Wilson. Though this date marks the beginning of the modern income tax, there were previous iterations of income taxes in the United States, one enacted during the Civil War (which expired in 1872) and another in 1894 (ruled unconstitutional the next year).
Prior to 1913, pressure was building for a federal income tax, particularly as the primary taxes in place in the late 19th century – tariffs and excise taxes – were seen as regressive and placed an unfair burden on the poor. The 1913 income tax was geared to raise revenue primarily from high-income individuals, and no one under the personal exemption amount of about $71,000 in 2013 dollars paid taxes. The income tax quickly changed, however, with the outbreak of World War I; tax rates rose and personal exemptions plummeted. But it was not until World War II that any substantial percentage of Americans paid the income tax.
Today, the income tax provides slightly less than half of all federal revenue, and is likely to remain one of the government's primary sources of income for the forseeable future. Over the years, the tax code has become increasingly riddled with provisions called tax expenditures, many of which we have been examining in our “Tax Break Down” series.
On the 100th anniversary of the income tax, maybe it’s time for a facelift.
The government is still shut down, the debt ceiling is fast approaching, and the need to put our debt on a sustainble path remains. This environment creates an opportunity for organizations to put forward a variety of budget options for lawmakers to consider. But because of the shutdown, a traditional supplier of those options is hamstrung.
As the shutdown drags on, people are becoming more familiar with what exactly happens as a result, either as they experience it personally or from the news. Yet one less visible, and ironic, effect of the shutdown is that the lack of funding for the government has crippled the very agency in charge of analyzing that government funding. Yes, the Congressional Budget Office has been mostly shut down.
CBO Director Doug Elmendorf announced on the eve of the shutdown that the only essential personnel in the agency allowed to stay on the job would be those involved in analyzing active legislation. So while CBO still has been able to provide cost estimates for a few bills that have looked to fund small parts of the government, all its other work has ground to a halt.
This is notable considering the significant amount of analysis they did during the lead up to the shutdown on their long-term budget outlook, in addition to other topics. It is quite notable given that CBO had planned to issue the biennial update of its Budget Options report this month. It is not clear when exactly they will release it, but a government shutdown could very well delay the release of the report if enough time is lost. A delay at this time would be significant, since lawmakers are certainly discussing options right now, either in the context of the debt limit or tax reform, the latter of which is expected to begin in the tax-writing committees this fall. Since Budget Options hasn't been updated in two and a half years, it is important to have more recent estimates of various policies.
As it turns out, this lack of a functional budget process could end up leaving lawmakers with less resources to work, especially at a time when they should finally decide to begin working toward a comprehensive fiscal deal.
As we enter day 2 of the government shutdown, Americans across the country are already feeling the impact. With federal government offices and services shut down throughout the nation, thousands of government employees are furloughed, and there is no clear answer in sight regarding when they will return to work. But what damage will a shutdown do to the economy?
In the past few days, a number of organizations have attempted to quantify the shutdown's economic impact. All of the estimates project that a shutdown will have a negative effect on fourth quarter GDP growth, with a varying impact depending on how long the shutdown lasts. Decreased compensation for federal employees, along with a reduction in purchases made by the government for products and services, will result in decreased federal government consumption as a share a GDP. Decreased consumer confidence could cause further negative economic impacts, which are more difficult to quantify, particularly at the outset of a shutdown.
If the shutdown lasts longer, more government services and agencies will run out of funding. Furloughed employees won't receive their paychecks and consumer spending could drop. Consumer confidence will almost certainly drop as Congress remains at an impasse, and government contractors would lose much, if not all, of their business. There are also many government operations which are helpful to a smooth flow of commerce, like new IPOs approved by the SEC, the monthly jobs report produced by the Department of Labor, and the approval of export licenses. If a shutdown lasts only a few days or a week, these factors likely won't have a large effect. But if the shutdown persists, these larger economic effects will start to show up.
Estimates vary, but a 1 week shutdown would likely decrease fourth quarter annualized growth by 0.1-0.2 percentage points. If a shutdown lasts a month, some estimates show fourth quarter annualized GDP growth decreasing by 1.5-2 percentage points, which would be particularly damaging considering the economy is only projected to grow at between 2.3 and 2.5 percentage points. In addition to the length of a shutdown, whether or not furloughed employees recieve back pay from the federal government would directly impact the economy. It is also worth acknowledging that while negative economic impacts may occur during a shutdown, economists generally agree that there will likely be a slight uptick when a shutdown ends, offsetting part of the negative economic effects.
In addition to the negative economic impacts, it is likely that the shutdown will end up costing the federal government money, as we noted in our recent Q&A on government shutdowns. For the last government shutdowns in 1995, which lasted a combined 26 days, OMB estimated the cost to the government at $1.4 billion, equivalent to $2.1 billion today.
These costs were, and still are avoidable. If Congress had done its job and passed appropriations on time, we would not be sacrificing economic growth at a time when it is sorely needed. However, attention will soon turn toward the looming debt ceiling, which, if breached, could have more devastating economic effects, as we explain in a new Q&A released today. Congress needs to take immediate steps to reopen government, raise the debt ceilng, and use this opportunity to focus on the mounting fiscal challenges we face. Failing to do so would have much greater economic consequences over the long term than any government shutdown.
In order to avoid bumping up against the statutory debt ceiling, the Department of the Treasury has begun undertaking a number of so-called "extraordinary measures". The current debt limit is $16.394 trillion.
|Debt (Gross / Subject to Limit)|
The Treasury Department is using its final extraordinary measure, a debt swap with the Federal Financing Bank and and the Civil Service Retirement and Disability Fund. Treasury still estimates extraordinary measures will be exhausted by October 17, when it will only have $30 billion left on hand. On a related note, a Treasury official said that a short-term shutdown would not affect this date. Read more here and here.
A letter from Secretary Lew to Congressional members now estimates that extraordinary measures will be exhausted by October 17. At that time, Treasury estimates the federal government only to have $30 billion of cash on hand, which is well short of net expenditures on certain days. Read more here.
Extraordinary Measures to Last Until Mid-October
|5/20/2013||Debt Issuance Suspension Period for CSRDF
The Treasury Department will enter into a "debt issuance suspension period" from 5/20/2013 through 8/2/2013. The Treasury Department will suspend additional investments to the Civil Service Retirement and Disability Fund (CSRDF). Additionally, the Treasury will suspend and redeem investments to the Postal Service Retiree Health Benefits Fund (PSFHBF).
Measures like this have been used in 1996, 2002, 2003, 2004, 2006, 2011, and 2012. Read more here.
|$19 billion|| $16,737,294/
Debt Ceiling Reinstated
Today, President Obama signed the bill originally proposed by House Republicans which temporarily exempts all debt issued from now until May 19th from the Debt Ceiling. By signing this bill, the debt ceiling is expected to be hit next in August because of extraordinary measures. The bill also requires that both Houses of Congress pass a budget resolution by April 16th or their pay will be withheld until they do, or the Congressional term ends in 2014. Read more here.
House Republicans unveiled a temporary debt ceiling fix which would extend Treasury's borrowing authority through May 19th. This measure would exempt debt issued between the date of passage and May 19th from the debt ceiling, but would not raise the actual dollar amount of the debt ceiling. Tied to this measure would be a provision which would temporarily withhold pay from members if no budget is passed. Read more here.
The Treasury Department has suspended investments of the Government Securities Investment Fund (G-Fund) of the Federal Employee's Retirement System in interest-bearing securities.
Measures like this have been used in 1996, 2002, 2003, 2004, 2006, 2011, and 2012. Read more here.
|$156 billion||$16,432,632/ $16,393,975|
Secretary Geithner has sent a letter to Speaker of the House John Boehner detailing the risks of a debt ceiling breach as well as calling on Congress to raise the debt ceiling as soon as possible due to the uncertainty of revenues during tax-filing season. In the letter, Geithner says that Treasury currently has enough borrowing authority, through the use of extraordinary measures, to last between mid-February and early March. Read more here.
The Treasury Department will enter into a "debt issuance suspension period" from 12/31/2012 through 2/28/2013. The Treasury Department will suspend additional investments to the Civil Service Retirement and Disability Fund (CSRDF). Additionally, the Treasury will suspend and redeem investments to the Postal Service Retiree Health Benefits Fund (PSFHBF).
Measures like this have been used in 1996, 2002, 2003, 2004, 2006 and 2011. Read more here.
|$29 billion||$16,432,730/ $16,393,975|
The Treasury Department has said that without taking extraordinary measures, it will exceed the debt ceiling imminently. The debt is now within $25 million of the statutory debt limit.
|12/28/2012||Final Business Day Before Extraordinary Measures Begin||$16,336,462/ $16,298,022|
In a letter to Congress, Secretary Geithner informed its members that the current debt ceiling of $16.394 trillion will be reached on December 31st, 2012 and that the Treasury Department would "begin taking certain extraordinary measures" afterwards. Using these measures will create about $200 billion in headroom, but because of the fiscal cliff, it is not known for how long these would last. Under normal circumstances, this would allow for about two additional months of time. Read more here.
While it is incredibly disappointing that elected officials in Washington failed to avoid a government shutdown, attention is quickly turning towards raising the federal debt ceiling, which currently stands at $16.699 trillion. The Treasury Department projects it will run out of borrowing authority on October 17th, at which point it will only have $30 billion left on hand, and would run out of cash soon after – between October 22nd and October 31st according to the Congressional Budget Office and between October 18th and November 5th according to the Bipartisan Policy Center.
Today, CRFB published a short primer on the debt ceiling and on the ways to responsibly address it while also dealing with unsustainable federal borrowing going forward. Below we summarize several of the questions that the primer answers. Click here to read the full Q&A.
What is the debt ceiling?
The debt ceiling is the legal limit on the total level of federal debt the government can accrue. The limit applies to almost all federal debt (certain types of debt are exempt, but are quite small in value), including the debt held by the public and what the government owes to itself through various accounts such as the Social Security and Medicare trust funds. The debt ceiling applies to both debt held by the public as a result of borrowing necessary to finance deficits, and debt owed to trust funds. As a result, the debt subject to limit increases both as a result of annual budget deficits financed by borrowing from the public and increases in government trust fund balances invested in Treasury bills. The current debt subject to limit of more than $16.7 trillion is composed of nearly $12 trillion in debt held by the public and slightly more than $4.7 trillion in debt held by government accounts.
How does a shutdown differ from a default?
In a shutdown, government temporarily stops paying employees and contractors who perform government services, whereas the list of parties not paid in a default is much broader (See Q&A: Everything You Should Know About Government Shutdowns). In a default, the government exceeds the statutory debt limit and is unable to pay on time some of its obligations to its citizens or creditors. Without enough money to pay its bills, any of its payments are at risk—including all government spending, mandatory payments, interest on our debts, and payments to U.S. bondholders. Whereas a government shutdown would be disruptive, a government default could be disastrous.
What happens if the debt ceiling is breached?
Once the government hits the debt ceiling and exhausts all available extraordinary measures, it is no longer allowed to issue additional debt. At that point, the government must rely on its remaining cash on hand and incoming receipts to pay all obligations. However, when the federal government is in a period of running annual deficits – as is the case today – incoming revenues to the federal government are insufficient to cover all of the government’s obligations, be it salaries for federal civilian employees and the military, utility bills, veterans’ benefits, or Social Security payments, to name a few. Between October 18th and November 15th, for example, the Bipartisan Policy Center estimates that approximately 32 percent of the government’s obligations would have to go unpaid, if relying only on incoming receipts to pay bills. Instead of or in addition to failing to meet these obligations, the government could also potentially default on regular interest payments on the debt. A default, or even the perceived threat of a default, could have serious negative economic implications.
What should policymakers do?
Failing to raise the debt ceiling would be disastrous, and would surely, and rapidly, result in severely negative consequences that experts are not capable of fully knowing in advance. Even threatening a default or taking the country to the brink of default could have serious negative repercussions. Given these facts, Congress and the President must raise the debt ceiling – and they should do so as soon as possible. Yet they should also pursue a deficit reduction plan which would ideally replace the sequester, reform the tax code to make it simpler and raise more revenue, slow the growth of entitlement programs, and put the debt on a clear downward path relative to the economy.
We hope that this Q&A will be a useful primer on the debt ceiling. Although the need to raise the debt ceiling can serve as a useful moment for taking stock of our fiscal state, lawmakers should enact a comprehensive deficit reduction plan without jeopardizing the full faith and credit of the U.S. government.
Former Comptroller General and CRFB Board Member David Walker writes in Public Finance International that the struggles in Detroit are a symbol of fiscal irresponsibility in other areas of government. Particularly with the federal government, lawmakers have put the country on a dangerous fiscal path over the last decade that cannot be sustained without negative consequences. Walker writes:
The US government, and large parts of American society, have strayed from the principles and values on which the country was founded and that helped to make it great. The federal government has also grown too big; both it and many state and local governments have overpromised in relation to what they can actually deliver. The recent budgetary problems besetting Detroit, Chicago and other US cities are a stark reminder of what is at stake.
For most of the initial 200 years of American history, spending was largely balanced with revenues – with the exception of times of war and major national emergencies, after which steps were taken to reduce debt burdens relative to GDP. But more recently, consistent peacetime deficits emerged, and then deficits became unsustainable and debt burdens mounted.
Walker points out that government at all levels face common problems, and Washington in particular must begin dealing with several structural challenges in a comprehensive manner:
Elected officials in government have so far failed to effectively address the four common challenges that all levels of government face: unfunded retirement obligations, escalating health care costs, outdated tax systems and spending more on consumption than investment. Policymakers should be attempting to achieve a grand bargain that tackles these four key issues, which collectively represent the disease that must be addressed to beat our fiscal cancer. It will take great political courage and leadership to address these in a coordinated and integrated fashion.
By far, the largest deficit the US faces is a leadership deficit. Presidents and the Congress, especially in the past 10 years, have not stepped up to the plate to address the structural deficits in a timely manner. The president has the greatest impact on whether or not progress is made at the federal level, but governors, mayors and other chief executives have just as much opportunity and obligation to lead in connection with the finances of their states and municipalities. These officials should step up to the plate and take action, or run the risk of following in Detroit’s footsteps.
The problem is well-known, as are main components of a comprehensive deal. What is missing is political leadership. Today, on day two of the government shutdown, lawmakers must come together to reopen the federal government in a responsible manner, and take steps to address the nation's structural financial challenges.
Click here to read the full piece.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.
Today, October 1st, marks the first day of the 2014 fiscal year for the government, and the first day of a government shutdown in which 40 percent of government workers have been sent home. Over the past year, we (partially) dived over the fiscal cliff, saw the start of sequestration after it was delayed for two months, and still did not touch the long-term drivers of debt. Here are some of the important numbers from last fiscal year.
- Increase in public debt: $656,596,378,105.73. Debt held by the public rose to $11.9 trillion, up from $11.3 trillion last year, although debt has been almost flat since April, largely because the Treasury Department has used extraordinary measures to avoid hitting the debt ceiling. Gross debt, which includes both public debt and intergovernmental holdings, increased to $16.7 trillion from $16.2 trillion.
- How much legislation increased the ten-year deficit, relative to current law: $4 trillion. In the January fiscal cliff deal, lawmakers chose to extend nearly all of the 2001/2003/2009 tax cuts and many other provisions without offsetting savings. Doing nothing and going over the fiscal cliff would have been disastrous for the economy in the short term, but the 10-year deficit would be $4 trillion smaller.
- How much legislation decreased the ten-year deficit, relative to current policy: $650 billion. When compared against a pessimistic "current policy" baseline that assumed all the tax cuts would be extended, policymakers were able to reduce the deficit by $650 billion, mostly by raising taxes on high-income individuals.
- Budget deficit as a share of GDP: 3.8 percent, down from 6.8 percent last year. Even though the short-term deficit has declined as legislated deficit reduction takes effect and the economy recovers, we've written many times that Congress still needs to deal with the long-term drivers of our debt. Under our current course, debt will equal the size of our economy by 2038.
- Minimum savings necessary to put debt on a clear downward path: $2.2 trillion. Although Congress has enacted some reforms in recent years, our budget projections show Congress must still enact $2.2 trillion of savings over the next ten years to put debt on a clear downward path this decade. In addition, the Congressional Budget Office found savings of $2 trillion are necessary just to keep the economy on its present course.
- Total number of FY 2014 funding bills passed: Zero. Congress has not passed any appropriations bills for the current fiscal year. The House has only passed 4 of 12, while the Senate has not passed any.
- Total number of temporary CRs passed to avoid a shutdown for FY 2014: Zero.
- Percent cut to spending as a result of sequester: 6.4 percent. After a short-delay, sequestration kicked in at the beginning of March, cutting all government programs across the board, which we think is a particularly dumb way to budget.
- Total tax expenditures eliminated under a blank slate: $1.3 trillion every year, or more than $16 trillion over ten years. Bigger than any other section of the budget, tax expenditures have been targeted under the Senate Finance Committee's "clean slate" approach, which eliminates all tax expenditures and forces lawmakers to justify adding them back. The House Ways and Means Committee is also expected to mark up a tax reform bill this fall. As we've explained in our Tax Break-down series, tax reform offers to an opportunity to simultaneously simplify the tax code, reduce tax rates, and reduce the deficit.
- Number of comprehensive Medicare plans offered last year: at least 8, including Simpson-Bowles, the Bipartisan Path Forward, the American Enterprise Institute, the Bipartisan Policy Center, the Brookings Institution, the Center for American Progress, the Commonwealth Fund, and the Urban Institute. (The National Coalition on Health Care also released a plan, but it was before the fiscal year). Health spending is the main driver of our long-term debt, and reforming Medicare offers an opportunity to bend the health care cost curve.
- Health Reform bills enacted by Congress: Zero.
- Number of years until Social Security becomes insolvent for the disabled: Two. Barring any federal action, the Disability Insurance (DI) trust fund will be exhausted in 2016 and could only pay 80 percent of scheduled benefits.
- Number of blogs written by CRFB: 627. We'll keep providing timely analysis of budget issues, and there are sure to be plenty in the coming year.
- Number of press releases in which CRFB or Fix the Debt have called for policymakers to put debt on a clear downward path: 106. We've constantly said that Congress should use the opportunity presented by fiscal negotiations to come to a long-term agreement that will put debt on a clear declining path by the end of the decade and address tax and entitlement reform.
- Number of times they have done it: Zero. We're still waiting.
Today is the first October, first day of 2014 fiscal year, and because of the failure of Congress, the first day of the government shutdown. Yesterday, we were facing a unsustainable fiscal outlook and we were dealing with the consequences of sequestration. But today, things are needlessly worse. The following are now true:
- More 800,000 federal employees are unable to go to work: The Washington Post has been keeping a tally of furlough decisions and has estimated that over 800,000 of the federal government's 2.1 million civilian employees will be sent home after reporting to work today. They will not receive pay during this period and backpay is not guaranteed.
- National Parks, Monuments, and the Smithsonian museums are now closed: The country's National Parks have closed, not only canceling the plans of many visitors, but also forgoing revenues from tourists. The Smithsonian institutions are also closed, with only security and National Zoo staff retained to maintain those facilities. Unfortunately for all of you panda lovers, the panda cam at the National Zoo has been turned off.
- Many government-supported research projects are on hold: Some staff will be retained to protect research property and medical services will be continued to be provided by NIH, but many projects at NASA, the National Institutes of Health, and many other research agencies will be halted for the meantime.
- Farmers now may find it harder able to obtain loans: Much of the activities of the Department of Agriculture will be curtailed, including housing loans to rural communities.
- E-Verify is not available: The Department of Homeland Security will be able to run most of its programs, but employers cannot access E-Verify information to confirm employment eligibility.
- It is harder for small businesses to get a loan: While the existing Small Business Association's loan guarantees will remain in effect, the agency will stop processing new loans until the shutdown is ended.
- The IRS is unable to process returns: We've said before that providing the IRS with more funds could actually close the "tax gap" of uncollected revenues. Instead, about 90 percent of the staff will be furloughed.
- The CBO is largely closed for business: The Congressional Budget Office, which we routinely rely on for budgetary analysis, will almost completely shutdown this afternoon, only retaining staff necessary to analyze legislation being actively considered by Congress. While lawmakers will still be able to obtain budgetary scores of any bill they consider, the closure of the agency responsible for most of the budgetary analysis speaks greatly of the progress lawmakers have made.
- Washington DC's city government continues to run on its reserve funds...for now: For those here in Washington, Mayor Vincent Gray has declared all of the city employees to be "essential" and will use a cash reserve fund to keep the city functioning fully for a few weeks. But if the government shutdown drags on, basic services in DC like trash collection could be affected as well.
These are just a select few of the things that are now true, just because Congress could not do its job. Our Government Shutdowns Q&A goes into more detail based on our previous experience with shutdowns in the 1990s.
This unnecessary crisis comes after we've talked time and time again about the benefits of providing a clear long-term plan for the nation's finances. Today's actions do not show the country we are serious about addressing the debt, in fact, it shows quite the opposite. As CRFB President Maya MacGuineas said in a press release:
The Campaign to Fix the Debt believes it is truly shameful that the most powerful nation in the world couldn’t reach a compromise to keep the government running. While the government may be shutting off its lights, the American people are at home trying to provide for their families, wondering why their nation's leaders are unable to work together.
This avoidable outcome highlights a dysfunction that threatens to spill over to other areas – like raising the debt ceiling – where failure to reach agreement would not just be disruptive, but have disastrous economic consequences both at home and abroad.
Congress has let an opportunity slip by and each day they fail to act the consequences will grow. Meanwhile, we are now only a few weeks away from needing to raise the debt ceiling, which could be far more dangerous. Addressing the real structural problems with our entitlement programs and tax code will be hard enough without these political detours. We hope lawmakers come to their senses and agree upon a government funding bill and debt ceiling increase, so we can turn to the real issues.
As we explained this morning, the House of Representatives recently passed a continuing resolution funding the government at FY 2013 levels through mid-December. In order to garner support from enough House Republicans, the bill also contains three Affordable Care Act-related provisions – it delays implementation of the Affordable Care Act for a year, it includes a provision that delays for a year the requirement that insurance plans cover contraception, and it permanently repeals the medical device tax.
The first two provisions are quite partisan and their deficit impact is unknown. The third provision – the medical device tax repeal – has the potential for bipartisan support (it was supported in the Senate by a vote of 79 to 20, with a majority of Democrats and all Republicans supporting). However, the device tax repeal would add to the debt and should not be part of any plan to fund the government without corresponding offsets.
The tax, which originated in the ACA and went into effect this year, is a 2.3 percent tax levied on the sale of medical devices by certain manufacturers, intended to be both a revenue-raiser and a way to compensate for the increased business manufacturers would gain as a result of the additional insurance coverage (a similar levy hit insurers). Repealing the device tax would cost about $30 billion through 2023 and would add about $35 billion to the debt when one accounts for interest costs.
Already, the funding levels in the CR are almost $20 billion higher than the caps set for FY 2014, meaning that if they are not brought back down in a subsequent funding bill policymakers will be violating the post-sequester caps set by the Budget Control Act. Yet instead of using the funding debate to make the hard choices necessary to meet or ideally replace sequester, the House bill would actually add to the budget deficit. This is an unacceptable practice, and a major step in the wrong direction, fiscally.
There may be a case to be made against the medical device tax, which critics -- particularly the businesses affected, of course -- charge would hurt sales, stifle innovation, and/or cause the manufacturing of such devices to be moved overseas (although imported devices are subject to the same tax and exported ones are exempt). But any repeal of the tax must be fully offset -- and could be either in the context of tax reform or health care reform. One option might be to replace the tax with an expansion of bundled payments for inpatient care, as a sizeable portion of the savings likely would come from physicians standardizing the devices they use, thus leading to greater efficiency and lower costs.
If lawmakers would like to replace the device tax with an alternative policy, there are many ways to do so. But the conversation about funding the government should be focused on avoiding a shutdown, dealing with the sequester, and addressing our larger budgetary challenges. That means finding ways to reduce the long-term deficit, not ways to increase it.
Not a Rockin’ Eve – Monday is New Year’s Eve...fiscally speaking as October 1 marks the beginning of Fiscal Year 2014. There may be a countdown, and a ball might even be dropped, but there will be no celebrating. Congress looks to go down to the wire in approving a continuing resolution that will fund the federal government in the new fiscal year. Instead of a New Years Rockin’ Eve, it will be more of a Blockin’ Eve as the House and Senate reject each other’s bills. Without a stopgap measure in place before midnight Monday, the government will shut down. Fighting over non-appropriations matters, namely the health care law, could cause Congress to drop the ball on a basic duty, funding the government. Even if a stopgap is approved before the deadline, little will be resolved since it will be for a very short period of time, meaning we would soon be back at this again. If only the late, great Dick Clark were still with us, we could send him to Washington to produce something much better.
Empty New Year’s Resolutions – Many of us have been guilty of making half-hearted New Year’s resolutions, but Congress is taking it to a new level. The House of Representatives and Senate have traded a series of continuing resolutions (CR) that each knows the other will not support. Early Sunday morning, the House passed a CR funding the federal government through December 15 while delaying the implementation of the Affordable Care Act (the health care reform law) for a year and repealing a tax on medical devices contained in the law. The Senate on Friday approved a CR lasting until November 15 without the health care and medical device tax provisions. Senate Majority Leader Harry Reid (D-NV) said the Senate will not approve the House bill and the White House promised a veto even if it did make it that far. The federal government will shut down when the current fiscal year ends at midnight tonight if policymakers cannot agree on a funding bill. Political posturing has prevented the budget and appropriations process from setting a clear fiscal path for the country. The current debate has been hijacked by outside issues instead of the fiscal matters that should be addressed. Short-term stopgap measures are taking the place of a longer term budget and spending framework. Policymakers must use the process to deal with the core budget challenges facing the country. We provided a blueprint here. With a government shutdown a distinct possibility, check out our answers to some key shutdown questions here.
Debt Limit Hangover Awaits – Just a couple weeks into the new fiscal year policymakers will have to deal with an even more consequential deadline regarding the statutory debt ceiling. Treasury Secretary Jack Lew says that he will exhaust “extraordinary measures” now being employed to avoid surpassing the limit by October 17, leaving Treasury with just $30 billion of cash on hand, and the Congressional Budget Office (CBO) says there will be no more room for maneuvering (including cash on hand) sometime between October 22-31. The same political brinksmanship plaguing the government funding discussion threatens to derail raising the debt limit, which would have even more severe repercussions than a government shutdown. Follow debt ceiling developments here.
Will We Resolve to Address the Debt? – The recent Long-Term Budget Outlook from the Congressional Budget Office (CBO) shows that, despite deficits coming down in the short term, the national debt remains a big problem in the long term. CBO projects that debt will reach 100 percent of the economy by 2038 and continue rising. CBO points out that debt at those levels will adversely impact the economy. Higher interest rates will affect private investment; increased payments to service the debt will crowd out public investments in areas such as education and infrastructure; higher debt means less flexibility to respond to problems that may arise; and debt could trigger a crisis of its own. In fact, interest on the debt is the fastest growing part of the federal budget under CBO’s projections. CRFB has updated its own Realistic Baseline in light of the new CBO numbers, and it isn’t a pretty picture. Under our base scenario, debt could reach 150 percent of GDP by 2050 and will continue rising. Factoring in these projections, we calculate that an additional $2.2 trillion in deficit savings over the next decade will be required to put the debt on a downward path. Looking out farther, the numbers are more daunting, requiring $13.5 trillion in deficit reduction over the next twenty years, or about 2.4 percent of GDP. In light of these numbers, the current debate in Washington seems quite trivial. The Peter G. Peterson Foundation takes a look at the fiscal deadlines facing the country and how they fit into the big picture.
Defending Against Debt – While serving as chairman of the Joint Chiefs of Staff, Adm. Mike Mullen said, “the most significant threat to our national security is our debt.” And the military has been called into action to confront it. Defense spending reductions account for half of the automatic cuts under sequestration. A new report from the Stimson Center offers specific recommendation for reducing defense spending without "hollowing out" the military.
Key Upcoming Dates (all times are ET)
- Fiscal Year 2014 begins. A continuing resolution must be approved by this date in order to prevent a government shutdown.
- 100th Anniversary of the Revenue Act of 1913, which instituted the federal individual income tax.
- Bureau of Labor Statistics releases September 2013 employment data.
- Bureau of Labor Statistics releases September 2013 Consumer Price Index data.
- The date when Treasury Secretary Jack Lew estimates that extraordinary borrowing measures will be exhausted and the government will breach the debt ceiling.
October 18 - November 5
- Time range in which the Bipartisan Policy Center estimates the statutory debt ceiling will be breached. A national default will occur unless the debt limit is raised before that point.
- Bureau of Economic Analysis releases advance estimate of 3rd quarter GDP.
Today is September 30, the last day of the government's fiscal year. If Congress does not agree on a continuing resolution today to authorize spending for the next fiscal year, tomorrow the government will shut down.
On Friday, the Senate passed a continuing resolution that accepted the House-preferred level of spending at $986 billion (just below sequester levels for non-defense appropriations and $19 billion higher than sequester levels for defense), funding the government through November 15.
On Saturday, the House considered the Senate bill and made amendments, funding the government for one month longer (through December 15), delaying the Affordable Care Act's implementation by one year, and repealing the medical device tax that partially funds the law. Repealing the medical device tax would cost $30 billion over the next ten years, adding to the deficit. Delaying the Affordable Care Act could increase or decrease the deficit, depending on the details.
As CRFB President Maya MacGuineas said in a statement:
We are extremely disappointed that instead of identifying a credible way to fund the government and comply with or replace the sequester, the House of Representatives is now calling for making the deficit worse rather than better by repealing the Medical Device Tax. The unproductive political brinksmanship we are in the midst of will virtually guarantee an 11th-hour deal, if not a full government shutdown, and it will do nothing to advance the causes of deficit reduction and entitlement reform.
It is unfortunate that lawmakers failed to use this fiscal hurdle as an opportunity to deal directly with how to meet or replace the sequester and make progress toward putting the debt on a clear downward path as a share of the economy. That House Republicans have focused on extraneous measures is bad enough, but that their focus is on deficit increasing policies is unacceptable.
So what happens now? The Senate is likely to take up the bill shortly after 2pm today, and then will promptly vote it down by a majority vote. Even if the Senate were to pass the House bill, the President has issued a veto threat. That puts the onus back on the House of Representatives to send another CR to the Senate, which would then have to be approved and signed by the President. All of this must happen by midnight, or else the government will shut down.
We've written recently about what such a shutdown would mean in Everything You Needed To Know About a Government Shutdown.
With less than one day to go, it is time for Congress to stop this brinksmanship, come to a short-term agreement to fund the government, and turn their attention to the more pressing issues of raising the debt limit and addressing our longer-term fiscal concerns through entitlement and tax reform.
In light of CBO's updated long-term projections, and our subsequent CRFB Realistic Long-Term Projections, CRFB has taken a fresh look at the minimum savings lawmakers still need to enact to control the debt for both this decade and the long-term. The bottom line is that we need still another $2.2 trillion in savings over the next ten years to put the debt on a clear downward path, and about $13.5 trillion over the next 20 years.
The Progress Made So Far
Importantly, lawmakers made some very welcomed progress on addressing deficits over the past few years, but the tough work of tax reforms and entitlement reform still remains. CRFB's calculations show that lawmakers have enacted as much as $2.7 trillion in savings over the next ten years, by some measures. These legislated savings have stemmed almost entirely from reducing and capping discretionary spending and from raising taxes on higher-income Americans.
CRFB has estimated that these already-enacted savings have helped reduce the debt from a projected 85 percent of GDP in 2023 to the current projections of 72 percent of GDP in 2023. It is a notable improvement, but unfortunately the debt remains on an upward path later this decade and even more so over the long term.
The Savings Still Needed This Decade and Over the Long Term
The savings that lawmakers have already enacted have almost entirely avoided addressing the central drivers of future debt: health care, retirement, and interest costs.
CRFB has called for at least $2.2 trillion in further savings over the next ten years to ensure the debt is on a downward path relative to the economy. That figure is sufficient to not only put the debt on a downward path this decade against current projecitons but also in the face of slightly slower economic this decade, higher deficits in the face of Congressional fiscal irresponsibility, or a faster phase-in of savings.
Over the long term, the necessary savings will be far higher. Extrapolating our “minimum path” beyond 2023, we find that policymakers must identify about $13.5 trillion of deficit reduction through 2033, which is about 2.5 percent of GDP over the same time period. The necessary savings increase to more than 5 percent of GDP through 2050 and more than 11 percent of GDP through 2080. Obviously, long-term projections rely on many uncertainties, but it drives home the extent to which we still have to tackle the debt.
Public Debt as a Share of the Economy
Looking only at the size of deficit reduction needed and not the composition of savings, we have enacted over one-half of the savings needed this decade to put the debt on a clear downward path. But compared to a long-term extrapolation of CRFB's ten-year minimum path, we have enacted only 40 percent of the minimum necessary savings by 2033, about one-third by 2050, and roughly one-quarter by 2080.
Ideally, lawmakers would go beyond the minimum necessary to control the debt this decade. Plans such as the Bipartisan Path Forward and the Domenici-Rivlin Debt Reduction Task Force would go well beyond these savings, address all areas of the budget, and focus on the long-term drivers of the debt to keep debt on a downward path after 2023.
Importantly, size isn't all that matters. The composition, timing, scope, and trajectory of savings -- including the extent to which a reform plan control health care costs and retirement costs and whether it enhances economic growth -- will also determine how far lawmakers actually go in fixing the debt.
At the House Budget Committee hearing on CBO's Long-Term Outlook, Rep. Reid Ribble (R-WI), who last week sent a letter calling for action on Social Security, asked CBO director Doug Elmendorf about the cost of waiting for solutions on Social Security. Elmendorf's response couldn't have been closer to what we said in our paper on the subject: that delaying changes would only necessitate that adjustments be larger and more abrupt. Here's how the exchange went:
RIBBLE: It seems in the three years I've been here it keeps -- that window keeps getting shorter and shorter. Some would say we should wait till we get to 2031 and then address it, because Congress seems to react better to crises than fiscal management. Is it more expensive to address it then or more expensive to address it now? I mean, is there a cost to waiting?
ELMENDORF: There is certainly a cost to waiting, Congressman.
RIBBLE: In what regard?
ELMENDORF: So the longer one waits to make changes, the larger the changes need to be and the more abruptly they would need to take effect. For Social Security right now, the age for full retirement benefits is working its way up as part of an agreement the Congress and president reached in the early 1980s. And that agreement was to do various things including phasing an increase in retirement age over a long period. But, the longer one waits to address the imbalance of Social Security and the federal budget as a whole, the less time one would have to phase in any changes that you and your colleagues agreed to.
Elmendorf went on to explain that Social Security's solvency problems, largely brought on by the retirement en masse of the baby boom generation, have been well known for a long time:
"This aging of the U.S. population is -- has been predicted for decades now. I recall Alice Rivlin, the first director of CBO, giving a talk that I saw in the 1990s, talking about how it wasn't really that far away. And - but nonetheless, a number of years have now passed with no changes."
You can see a video of Ribble's exchange with Director Elmendorf below.
This is the ninth post in our blog series, The Tax Break-Down, which will analyze and review tax breaks under discussion as part of tax reform. Last week, we wrote about accelerated depreciation, the largest corporate tax break.
Individual Retirement Accounts (IRAs), first created in 1975, allow people to make tax-deferred contributions into special accounts designated for retirement. Unlike 401(k)s or 403(b)s, IRAs are managed by the individual and not provided by nor tied to an employer. IRAs hold more than 25 percent of all retirement assets in the nation.
Absent preferential treatment, retirement contributions would be made with post-tax dollars, and then the interest, dividends, and capital gains would face further taxation. A traditional IRA allows contributions to effectively be paid with pre-tax dollars, with taxation of this contribution – along with any gains, dividends, or interest – deferred until the account-holder withdraws the funds at retirement.
In addition to traditional IRAs, most taxpayers since 1998 have had the option of contributing to a “Roth IRA,” named after its sponsor, former Sen. William Roth (R-DE). A Roth IRA works in reverse of a traditional IRA. Initial contributions are made with post-tax dollars, but then can be withdrawn tax-free. In theory, the tax benefit of the two accounts are equivalent if a taxpayer is in the same tax bracket throughout their life, though taxpayers can choose between plans (and convert between them in certain circumstances) to minimize their tax burden.
In addition to traditional and Roth IRAs, a host of smaller IRA options, including SEP, SIMPLE, and “deemed” IRAs, are available to small employers. Each of these accounts has its own set of rules and restrictions.
*This amount is indexed for inflation. The amount is for 2013. For Roth IRAs, an individual above the income limits cannot make any contributions. For traditional IRAs, an individual above the income limits can still make contributions, but they are not tax-deductible if the person also has access to an employer-sponsored plan.
How Much Does It Cost?
According to the Joint Committee on Taxation (JCT), all types of IRAs together will cost $15 billion in lost income tax revenue in 2013, or more than $250 billion over 10 years. OMB provides a similar estimate at $16 billion per year.
This benefit is smaller than many of the other large preferences for retirement savings. The tax exclusions for Social Security benefits and defined benefit plans each cost about twice as much at $33 billion in 2013. The exclusion for defined contribution plans, like 401(k)s, costs almost four times as much at $57 billion in 2013.
Importantly, repealing IRAs would result in far less revenue than JCT’s estimate of the tax expenditure cost – particularly in the short and medium run – perhaps only one-fifth as much in the first decade. In fact, eliminating Roth IRAs could actually reduce short-run revenue since those products encourage taxpayers to pay taxes in advance which could be deferred to future years.
Who Does It Affect?
According to the Employee Benefit Research Institute, 16.6 million individuals have over $1.4 trillion invested in IRAs. Benefits are concentrated among a relatively small group of people; in 2009, only 5 percent of workers made a contribution to an IRA. Higher-income workers are more likely to have IRAs: over 30 percent of workers with family incomes above $75,000 have an IRA, compared with less than 10 percent for families making under $10,000. Of those who contributed to IRAs, over one-fifth contributed the maximum amount.
IRAs provide greater benefits to individuals at higher income levels who are able to save more, and individuals who are more tax-savvy and able to calculate the long-term benefit of deferred taxation. Also, the choice between Roth and traditional IRAs provides the most benefit to individuals with a large spread in tax rates between the beginning and end of their careers. In 2004, the Tax Policy Center estimated that roughly 60 percent of IRA tax benefits accrued to the top 20 percent of households, and that more than 85 percent of benefits accrue to the top 40 percent of households.
Source: Tax Policy Center
What are the Arguments For and Against Individual Retirement Accounts?
Proponents argue that IRAs are a critical part of retirement savings, which are still far lower than financial firms recommend. Private assets built up in accounts like IRAs form the foundation for retirement savings, along with Social Security and employer-sponsored plans. In addition, providing tax-free treatment of IRAs prevents a tax on savings. Many proponents of this argument would shift further to a consumption tax and exempt all savings from taxation.
Opponents point out that, while encouraging retirement savings is a laudable goal, current retirement incentives are poorly targeted and yield limited returns. They are a vehicle for wealthy individuals to convert a substantial share of their taxable assets into tax-free retirement assets. Further, opponents point to studies that find little evidence that IRAs increase saving; the only people that pay attention to tax benefits are those that would save anyway. Finally, they point to an analysis that ending Roth accounts would increase national saving, because any individual with an IRA and tax-preferred debt (such as a mortgage) is participating in a “shell game” and gets a tax-free windfall from the government.
What Have Other Plans Done and What Are the Options For Reform?
Many tax reform plans would consolidate the various types of retirement accounts. The Simpson-Bowles and Domenici-Rivlin plans contained the same model, limiting contributions to $20,000 or 20 percent of income. Wyden-Gregg would create one larger “Lifetime Savings Account,” nearly tripling the yearly contribution limit to $14,000. The consolidated account offered by President Bush's 2005 Tax Reform Panel offered a number of features to increase retirement savings: automatic enrollment and a savings percentage that increased for workers nearing retirement. The Center for American Progress would also consolidate accounts.
The New America Foundation would abolish all currently tax-favored retirement accounts, replacing them with one that offered automatic enrollment, and expand Social Security benefits. Both AARP and the Center for American Progress would replace the tax break with a refundable tax credit that was deposited directly in the retirement account.
A number of smaller options are available to reform IRAs without repealing or dramatically reforming them. Yearly contribution limits could be decreased, or the value of deductions could be limited to 28 percent as proposed in the President’s Budget. Another option is to require inherited IRAs to be paid out within 5 years, which would prevent the tax benefits from being extended for decades by being passed to a very young beneficiary.
Options also exist to expand the tax preferences around IRAs. The minimum distribution requirements, which are designed to limit tax planning by large estates, could be eliminated for small accounts. The President has also proposed creating automatic IRAs, which would allow employees to contribute to IRAs through payroll deductions. Employees would contribute by default, but they could opt-out or change their contribution amount.
In a future post about other retirement vehicles, we will present further reform options along with budgetary estimates where available.
Where Can I Read More?
- Congressional Budget Office – Individual Retirement Accounts
- Employee Benefit Research Institute – Individual Retirement Account Balances, Contributions, and Rollovers, 2011
- The Hamilton Project – Better Ways to Promote Saving Through the Tax System
- AARP – New Ways To Promote Retirement Savings
- The Urban Institute – Why Not a “Super Simple” Savings Plan for the United States?
- AARP – The Case for Automatic Enrollment in Retirement Accounts
- Calvin Johnson – Repeal Roth Retirement Plans to Increase National Saving
- Joint Committee on Taxation – Present Law and Analysis Relating to Individual Retirement Arrangements
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Individual Retirement Accounts have been a major part of some American’s retirement planning since 1975, especially for those who are not offered employer-sponsored retirement plans. Yet these accounts are only used by 5 percent of workers and the benefit accrues largely to the wealthiest taxpayers. Although many taxpayers have substantial assets built up in retirement accounts, studies indicate many of these taxpayers would have saved anyway, suggesting that the tax break is providing an unnecessary subsidy. Many tax reform plans have offered suggestions to consolidate accounts, incorporating features that would incentivize better retirement habits for a broader portion of the population, like auto-enrollment plans and contributions that grow as workers near retirement. Tax reform offers an opportunity to simplify retirement provisions, improve saving incentives, and raise revenue to reduce tax rates, reduce the deficit, or both.
Read more posts in The Tax Break-Down here.
Last week, Senator Carl Levin (D-MI) introduced legislation that would increase taxes on multinational companies, and suggested that the revenue should be used as part of a sequester-replacement package. According to Sen. Levin's office, the bill S. 1533 will raise $220 billion over 10 years, which could replace two years of the sequester in full or two-thirds of the sequester over three years. Senator Levin touts his bill as a way to improve fairness and undo the harmful effects of the sequester:
We should end these loopholes regardless of our budget situation, because they are blatantly unfair. But surely now, with sequestration continuing to damage military readiness, education, life-saving medical research and more, we should end these offshore tax avoidance schemes and use the revenue as part of a balanced plan to replace sequestration.
Levin's bill would take a number of steps. One of the bigger changes is requiring multinationals to defer deductions for overseas operating and moving expenses until they repatriate profits currently held offshore (in other words, a company cannot deduct expenses until it pays tax on the associated income). The bill would also change the way the foreign tax credit is calculated, requring companies to "pool" credits they receive, ending the practice of claiming more credits in high-tax countries to count against income in low-tax countries.
The bill would decrease tax benefits associated with transferring intellectual property to other countries by taxing "excess" returns related to those agreements, and it would prevent domestic parent companies from repatriating income tax-free using loans from foreign subsidiaries. It would also eliminate the "check the box" tax break, which was originally put in place for administrative simplification purposes and allows multinationals to escape taxation on the income of certain associated entities.
This table contains the known estimates for provisions in Senator Levin's bill, along with our very rough estimates based on similar policies which have already been scored.
|Savings in S. 1533 (billions)|
|Eliminate "check the box" tax treatment||$35 billion|
|Determine foreign tax credit on a "pooling" basis||$45 billion|
|Tax excess returns to overseas intangible property||$20 billion|
|Defer overseas expenses deductions until income is taxed||at least $50 billion|
|Give IRS greater authority to fairly assess value of intangible property||less than $5 billion|
|Other Provisions||up to $70 billion|
Source: JCT, Senator Levin, and CRFB Calculations
We appreciate Senator Levin's contribution to the debate on how to address the sequester in a fiscally responsible way. Though the sequester is poor policy, and there is a strong argument for repealing and replacing it, policymakers must follow Senator Levin's example and ensure that any sequester fix does not add to the deficit.
In the coming days, weeks, and months, Congress must work together to address a number of important fiscal issues. Senator Levin's bill provides a number of helpful ideas which could be considered in the context of sequester replacement, deficit reduction, or tax reform. Policymakers should work on a bipartisan basis to achieve all of these goals, which will require putting all ideas on the table.