1 Tax and Budget Issues Facing the Next President Jon Forman Alfred P. Murrah Professor of Law University of Oklahoma Law and Society Association Law, Society, and Taxation Panel 01 Montreal, Canada May 29, 2008

2 The Budget Outlook Short-term –Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2008 to 2018 (January 23, 2008) Long-term –Congressional Budget Office, The Long-Term Budget Outlook (December 2007) –David Walker, Fiscal Social Security and Health Care Challenges (GAO CG, 2008)

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9 Social Security Finances 2007 Trust Fund income = $785 billion (taxes) Trust Fund outgo = $595 billion (benefits) Surplus = $190 billion Social Security Administration 2008 Trustees’ Report

10 Social Security Administration, 2008 Trustees’ Report

11 The Long-Range Forecast (Best estimate) In 2017, tax revenues into the trust funds forecasted to be less than benefits due that year. Interest on the reserves and the assets themselves will help pay for benefits until In 2041, reserves are projected to be depleted. Income is forecast to cover 78% of benefits due then. By 2082, assuming no change in taxes, benefits or forecasts, revenue would cover 75% of benefits due then.

12 Social Security’s Financing Problem 2008 Trustees Report shows –Expenses will exceed payroll tax income in 2017 –Trust funds will be out of money in year deficit equals 1.70% of taxable payroll –Immediate payroll tax increase of 1.70% needed to restore actuarial balance –Alternatively, immediate 11.5% across-the-board benefit cut –$4.3 trillion unfunded liability (over 75 years) –About 0.6% as a share of the entire economy (GDP)

13 SS Unfunded Obligations (Present values as of January 1, 2008; trillions of dollars) Present value As a % of future payroll As a % of GDP Over the infinite horizon $ Over the next 75 years Social Security Administration, 2008 Trustees’ Report, Table IV.B6.

Medicare Trustees’ Report

15 HI Unfunded Obligations (Present values as of January 1, 2008; trillions of dollars) Present value As a % of HI taxable payroll As a % of GDP Over the infinite horizon $ Over the next 75 years Social Security Administration, 2008 Medicare Trustees’ Report, Table III.B10.

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17 Tax provisionExpiration date Total Estate & Gift12/31/ Income Tax, EGTRRA 12/31/10n.a , % rate, c.g.12/31/10n.a % rate, div.12/31/ Increased AMT exemption 12/31/ AllVarious ,830.4 Effects of Extending Expiring Tax Provisions (Billions of dollars) Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2008 to 2018, Table 4-9

18 Clearly Revenues Are Needed The revenues that are expected to result from that scheduled expiration of those tax cuts are built in to the baseline numbers that Congress and the president use to put together the annual budget. No agreement means all those tax provisions expire –Is that a tax increase? I expect Congress and the President to agree –Is that a tax cut? –How big a deficit can they live with?

19 Top 10 Income Tax Expenditures, 2009 (Billions of Dollars) Health insurance exclusion $168 Mortgage interest deduction (k) plans 51 Charitable contrib. (other than health & education) 47 Accelerated depreciation 44 Capital gains (except timber, iron ore, coal) 55 Deductible nonbusiness state and local taxes other than on houses 33 Employer plans 46 Step-up of basis at death 37 Capital gains exclusion on homes Federal Budget, Analytical Perspectives, Chapter 19, Tax Expenditures, Table 19-3

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21 McCain's Proposed Tax Plan (Billions of Dollars) Provisions and sources FY2009FY (1) Extend non-estate tax cuts ,663 (2) Repeal the individual AMT ,761 (3) Double the dependent exemption (4) $5 mil. estate tax exemption, 15% rate (5) Reduce corp. tax rate to 25%, etc ,363 (6) Permanent R&D credit (7) Gas tax holiday-10 Total of above provisions ,748 Taxes as % of GDP (current law) Taxes as % of GDP (proposed) Urban-Brookings Tax Policy Center, T

22 Options to Adjust Social Security Earnings Cap Calendar Year Eliminate Earnings Cap123.71,476.4 Create "Donut Hole" up to $200, Urban-Brookings Tax Policy Center T

23 Tax Base Income Consumption Earnings Wealth

24 Principles to Guide Tax Legislation Distribution matters –A just distribution of economic resources Progressivity Taxing earnings and investments –Intergenerational justice/ Deficits Behavioral consequences matter –Encourage work and savings –Marriage penalties and bonuses –Keep effective tax rates as low as possible –Growth and a stronger dollar Simplification

25 Conclusion Tax laws are always temporary –No tax break or tax rate is ever safe for long Congress is already counting on trillions when Bush cuts expire –More needed to fix the AMT, Social Security, and Medicare. President needs 60 votes in the U.S. Senate –The whole tax system will be in play –The lobbyists will be tripping over each other Change is always incremental

26 About the Author Jonathan Barry Forman (“Jon”) is the Alfred P. Murrah Professor of Law at the University of Oklahoma, where he teaches courses on tax and pension law. Professor Forman is also Vice Chair of the Board of Trustees of the Oklahoma Public Employees Retirement System (OPERS) and the author of Making America Work (Washington, DC: Urban Institute Press, 2006), Prior to entering academia, Professor Forman served in all three branches of the federal government. He has a law degree from the University of Michigan, and he also has master’s degrees in economics and psychology. Jon can be reached at or (405) His web page is