Paul L. Caron
Dean





Tuesday, July 11, 2023

Cato Institute: CBO 30-Year Budget Projections Show Mandatory Spending Growth Rate Cannot Be Tamed With Tax Increases

Cato Institute, Did Tax Cuts Cause Rising Deficits?:

The current federal budget deficit and the accumulated debt result from Congress spending more than they are willing to raise in taxes. Ultimately, the question of which is more to blame—steady taxes or ballooning spending—will depend on our priors: should the government consume an ever‐​increasing share of private resources, or should its growth be constrained?

However, the recently updated CBO long‐​term budget outlook makes clear that the causes of the future budget deficit is not a question of normative judgment. Tax increases cannot fix the underlying growth of health and retirement spending. Even if tax revenues permanently increased to the levels collected when the United States had a budget surplus in 2000, projected deficits would still rise above 9 percent of GDP by 2053. Tax cuts are not to blame for the demographic and benefit‐​formula‐​fueled growth in mandatory spending. ...

Figure 1 shows historical and projected revenue and outlays from 1970–2053. In 2022, federal revenue as a percent of GDP was at a two‐​decade high, and this year’s revenue as a share of the economy is projected to be 18.4 percent of GDP, a whole percentage point above the historical average. Over the next three decades, revenues will remain above the historical average, climbing to 19.1 percent by 2053. After recovering from the pandemic spike, outlays are projected to climb past their current highs, rising from more than 24 percent of GDP in 2023 to 29.1 percent of GDP in 2053.

Cato

The CBO projections are subject to some well‐​known flaws. First, it is based on current law, which assumes unrealistic things, such as Congress allowing all the temporary 2017 tax cuts to expire and discretionary spending growing slower than the economy. Second, it cannot account for new spending Congress will authorize in the future, whether due to an emergency—war, recession, pandemic—or politically expedient spending on student loan forgiveness or additional energy subsidies. Third, the projections are based on speculative assumptions about economic growth, inflation, interest rates, and healthcare costs. None of these flaws change the critical takeaway from the CBO projections: even with assumed significant tax increases and conservative spending projections, the federal budget is unsustainable. ...

 Fixing the unsustainable growth rate of federal spending is necessary regardless of the desired level of government spending and preferred tax rates. ...

Ultimately, focusing on revenue distracts from fixing the existential fiscal problems faced by the U.S. The growth rate of health and retirement spending is not a problem that can be fixed with higher taxes. As Jeff Miron wrote in 2013, “If higher taxes have even a modest negative impact on growth, tax increases have no capacity for restoring fiscal balance. That finding leaves expenditure cuts—especially to Medicare, Medicaid, and ACA subsidies—as the only viable avenues for significant reductions in fiscal imbalance.”

CBO has similarly warned every year for the past several decades that spending on health and retirement programs cannot continue to grow faster than the economy forever; eventually, something has to give. These major entitlement programs are responsible for almost all of the non‐​interest spending growth over the next three decades and, as a share of the economy, are projected to increase by 36 percent over the same time. Such rapid health and retirement spending growth is neither caused by nor fixable with the tax code.

https://taxprof.typepad.com/taxprof_blog/2023/07/cbo-30-year-budget-projections-show-mandatory-spending-growth-rate-cannot-be-tamed-with-tax-increases.html

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