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A CBO Political Review

By Children’s Home Society of Florida Foundation

The nonpartisan Congressional Budget Office (CBO) is responsible for providing Congress with financial estimates for future budget and tax policies. CBO Director Douglas Elmendorf testified before the Budget Committee of the House of Representatives on June 6.

Elmendorf started by noting that the public federal debt for the past 40 years has averaged 38% of the economy. At the end of 2008, the public debt was 40% of gross domestic product (GDP). By the end of 2012, the public debt will be 70% of GDP.

Elmendorf pointed out that there are two major trends that will substantially impact the federal budget. First, there are 78 million baby boomers that will be retiring and receiving benefits from Social Security and Medicare. Second, the cost of healthcare for the past decade has been increasing more rapidly than the general inflation rate. He suggests that this increasing cost for healthcare is going to continue for the foreseeable future.

Elmendorf then offered two scenarios for the future. He called these the “baseline scenario” and the “alternative scenario.”

Baseline Scenario

The baseline scenario assumes that the current law will be applicable. On January 1, 2013, the existing tax cuts will expire. In addition to higher tax rates, many individuals will be subject to alternative minimum tax. Finally, the 3.8% tax under the Affordable Care Act will apply starting in 2013.

With the substantial tax increases under the baseline scenario, federal tax revenue increases to 24% of the economy by the year 2037. Elmendorf noted that this would be the highest level of taxation since World War II. Under this scenario, the increasing tax revenue permits debt to be reduced from the current 70% to 53% of GDP by 2037.

The alternative scenario assumes that Congress will follow the pattern of the past four years. The tax cuts enacted in 2001 and 2003 will be extended. The alternative minimum tax exemptions will be indexed. The $5.12 million applicable exclusion amount for gift and estate taxes will continue (with indexed increases in future years). Medicare payment rates for physicians will continue to increase. This last provision has been called the “Doc Fix” in Washington. Finally, federal budgets will continue with the same general provisions that exist today.

Under the alternative scenario, the increasing deficits lead to public debt of 90% of GDP by 2022. With the rising expenditures for the baby boom generation, the public debt increases to 200% of GDP by 2037.

Elmendorf Opines

Elmendorf noted that many economists believe that this large debt may lead to creation of fewer new jobs. He suggested that it will be necessary to increase revenue and decrease spending substantially from projected levels to avoid a large increase in the national debt. He did not specify how this should be accomplished.

Assessment

Chairman of the Federal Reserve Ben Bernanke also testified before Congress this week. He pointed out that January 1 is a “fiscal cliff” that could have great impact on the nation. Bernanke believes that the scheduled increase in taxes and reduction in spending should be spaced out over time to avoid a dramatic impact in January. However, he also declined to offer any advice on specific ways to increase taxes or cut spending.

Editor’s Note: These discussions in Congress are preparations for the legislative session that will occur following the November election. Congress is debating the combination of tax increases and budget cuts to pass this year. In addition, preparations are being made for a major tax reform act in 2013.

Conclusion

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Filed under: Accounting, Taxation | Tagged: "Doc Fix", ACA, Affordable Care Act., Ben Bernanke, CBO, CBO Director Elmendorf on Debt and Taxes, COngressional Budget Office, GDP, SGR | 3 Comments »