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Lack of Revenue Will Lead to Big Future Budget Deficits

CBO Report Reveals that Expected Tax Cuts, Not Spending, Are to Blame for the Red Ink

SOURCE: AP/J. Scott Applewhite

Congressional Budget Office Director Douglas Elmendorf prepares to testify on Capitol Hill in Washington before the Joint Select Committee on Deficit Reduction.

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Our federal government has a revenue problem. If we end up drowning in a sea of red ink over the next 10 years, it will be mainly because we decided to continue cutting taxes like it was going out of style. So says the latest report from the nonpartisan Congressional Budget Office, released today.

Oh, of course, they didn’t use those words. But the message is nonetheless very clear.

You see, today the CBO projected that in five years the federal budget deficit will decline to its lowest level since 2001 and that the national debt will peak next year and begin a steady decline after that.

But don’t expect much celebration. Almost no one thinks that will happen. That’s because the CBO’s relatively rosy numbers are a projection of what the federal budget will look like if we strictly follow current law. This implausibly means:

  • Implementing all of the automatic spending cuts triggered by the failure of the so-called “super committee” in Congress to reach a deficit-reduction accord late last year
  • Allowing all of the Bush tax cuts to expire as scheduled
  • Making no effort to index the alternative minimum tax to inflation
  • Letting the myriad business tax cuts that expired at the end of last year stay expired
  • Cutting Medicare doctor payments by the full amount under the so-called sustainable growth rate formula

Most observers predict Congress will never allow all those policies to come to pass. And there’s good reason for that prediction. The Bush tax cuts have already been extended once, the alternative minimum tax has been routinely “patched” to avoid affecting middle-income taxpayers, and the business tax breaks that expired last year have been extended so often in the past that they are now known collectively as the “tax extenders.” Similarly, the sustainable growth rate formula for doctors’ Medicare payments—known on Capitol Hill as “the doc fix”—has never been fully implemented.

As for the automatic spending cuts that resulted from the inability of the super committee to reach a deal, there are already members of Congress suggesting rolling some of them back.

So if Congress does what it has recently done so often, and extends all the expiring tax policies and avoids all the scheduled cuts, what then happens to the federal budget? Not surprisingly, the deficit explodes. Instead of a federal budget deficit equal to 1 percent of our economy in 2017, it’ll be 4.9 percent. Instead of debt peaking next year and then declining, we’ll have debt rising rapidly past 90 percent of gross domestic product. It’s this scenario that has budget experts worried.

Figure 1

Here’s the rub. The major problem with this gloomy scenario is not overspending—it’s maintaining our extremely low-tax policies. To be sure, some of the difference between the official CBO projection and the frightening “big deficits” projection is due to higher spending, but the vast majority of the difference is the direct result of lower revenues.

Today’s CBO report predicts that the budget deficit in 2022 will be $339 billion. But if Congress goes the “business as usual” route, then the deficit 10 years from now is expected to be $1.5 trillion—a difference of $1.157 trillion. Of that difference:

  • $493 billion comes from extending the Bush tax cuts
  • $140 billion is the result of indexing the AMT to inflation
  • $77 billion results from reinstating a variety of expired business tax breaks

And since all of these policies would mean more debt, they would also mean more spending, as interest payments on that debt rise. That adds another $246 billion to 2022’s deficit. Altogether, tax cuts account for fully 83 percent of the difference between the tiny deficits of the CBO’s estimate and the enormous deficits that have everyone worried.

By contrast, passing a “doc fix” that prevents the sustainable growth rate formula from triggering big reductions in payments to Medicare doctors and rolling back the “sequester” budget cuts mandated by the Budget Control Act of 2011 after the failure of the super committee deliberations, along with the attendant increases in interest payments, would add only $201 billion to the deficit in 2022. That’s real money, but it pales in comparison to the cost of extending all those tax cuts.

Despite all the rhetoric to the contrary, revenue—or the lack of it—is the main reason why we expect big federal budget deficits over the next decade. Today’s CBO report is just the latest in a long line of reports suggesting that our budget situation would be far less troubling if we followed the fiscal path set out by the laws that are currently on the books.

But since no one believes that Congress will do that, we end up worrying about a future in which Congress decides to keep taxes extremely low and thus produces enormous budget deficits.

Michael Linden is the Director for Tax and Budget Policy at American Progress.

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