ABA Presentation-The U.S. Fiscal Trajectory: Causes and Consequences

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ABA Presentation-The U.S. Fiscal Trajectory: Causes and Consequences

  1. 1. Tax Policy Center|www.taxpolicycenter.org<br />The U.S. Fiscal Trajectory: Causes and Consequences<br />Joseph Rosenberg<br />Urban-Brookings Tax Policy Center<br />ABA Section of Taxation Midyear Meeting<br />January 21, 2011<br />Boca Raton, FL<br />
  2. 2. Short-run Fiscal Path is Troubling…<br />Tax Policy Center|www.taxpolicycenter.org<br />Source: Congressional Budget Office (August 2010), Auerbach & Gale (2010)<br />
  3. 3. Short-run Fiscal Path is Troubling…<br />Tax Policy Center|www.taxpolicycenter.org<br />Source: Congressional Budget Office (August 2010), Auerbach & Gale (2010), JCT<br />
  4. 4. Short-run Challenges<br />While economy shows signs of recovery, unemployment remains high and…<br />…the economy is still vulnerable:<br />Fiscal condition of state/local governments<br />Housing market<br />International concerns (fiscal & currency)<br />Temporary provisions in U.S. tax code<br />Tax Policy Center|www.taxpolicycenter.org<br />
  5. 5. No Easy Choices for Deficit Reduction<br />Tax Policy Center|www.taxpolicycenter.org<br />Outlays, 2011-2020<br />Revenues & Deficit, 2011-2020<br />Source: Congressional Budget Office (August 2010)<br />
  6. 6. Long-run Fiscal Path is Frightening…<br />Tax Policy Center|www.taxpolicycenter.org<br />Source: Congressional Budget Office, “The Long-Term Budget Outlook” (June 2010).<br />
  7. 7. Long-run Fiscal Path (cont.)<br />Fiscal Gaps (Auerbach & Gale, 2010):<br />CBO Baseline: 5.6% of GDP<br />Current Policy: 8.0% of GDP<br />Memo: Auerbach (1994): 5.3% of GDP<br />Sources of long-run spending growth<br />Demographics<br />“Excess cost growth” in health expenditures<br />Tax Policy Center|www.taxpolicycenter.org<br />
  8. 8. Effects of Aging and Rising Health Costs on Primary Spending<br />Tax Policy Center|www.taxpolicycenter.org<br />Source: Congressional Budget Office, “The Long-Term Budget Outlook” (June 2010).<br />
  9. 9. Risk of Catastrophic Budget Failure(Burman, Rohaly, Rosenberg, Lim, 2010)<br />Policymakers<br />Incentives are short-term (i.e. next election)<br />Irresponsible fiscal policy for strategic reasons<br />e.g. strategic debt accumulation, delayed stabilization<br />Lenders<br />Myopia or “Irrational Exuberance” about the ability of U.S. policymakers to correct policy<br />Ulterior motives<br />Tax Policy Center|www.taxpolicycenter.org<br />
  10. 10. Publicly Held U.S. Debt by Maturity<br />Tax Policy Center|www.taxpolicycenter.org<br />Source: U.S. Treasury, Monthly Statement of the Public Debt (as of September 30, 2010)<br />
  11. 11. Major Holders of U.S. Debt<br />Tax Policy Center|www.taxpolicycenter.org<br />Source: Federal Reserve Flow of Funds and U.S. Treasury (as of September 30, 2010)<br />
  12. 12. Catastrophic Budget Failure (cont.)<br />Bond markets appear unconcerned, but reaction could be sudden and dramatic<br />e.g. multiple equilibria, herd behavior<br />Macroeconomic costs of delay may be minor, but macroeconomic costs of a crisis would be severe<br />U.S. debt crisis likely not imminent (nor requires immediate fiscal consolidation), but fiscal adjustment is needed and delay is costly<br />Tax Policy Center|www.taxpolicycenter.org<br />
  13. 13. Recent Fiscal Developments<br />Budget Reform Plans<br />Bowles-Simpson Fiscal Commission<br />Bipartisan Policy Center Debt Reduction Task Force<br />Policymakers<br />“Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010”<br />Optimist’s take: Provides temporary boost to fragile recovery and buys time for serious budget/tax reform<br />Pessismist’s take: Giveaways traded for more giveaways. Why will 2012 be any different than 2010?<br />Tax Policy Center|www.taxpolicycenter.org<br />
  14. 14. Challenges for Tax Policy Going Forward<br />“To spend is to tax”<br />We cannot continue to choose the level of revenue and spending independently<br />More revenue is needed, but how much?<br />The challenge is not simply to design an efficient tax system for a given level of revenue, but also for it to have the flexibility to satisfy a range of revenue needs. <br />Tax Policy Center|www.taxpolicycenter.org<br />U.S. Fiscal Policy, 1970-2013<br />

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