Robert Ricketts Frank M. Burke Chair in Taxation October 2010

Trend Lines: Revenues & Expenditures (first 11 months each year) RevenuesExpendituresDeficit GrossChange (%)GrossChange (%)GrossChange (%) 20062,123,3782,427,741304, ,282, %2,556, %274, % 20082,251, %2,751, %500, % 20091,885, %3,255, %1,370, % 20101,916, %3,176, %1,259, % Source: Monthly Treasury Statements (

Explaining the Deficit: Change in U.S. Federal Tax Revenues ChangePercent Individual Income Taxes$1,145,700$915,300($230,400)-20.11% Corporate Income Taxes304,430138,200(166,230)-54.6% Social Security Taxes900,200890,900(9,300)-1.03% Unemployment Insurance39,53537,431(2,104)-5.32% Estate & Gift Taxes28,80023,500(5,300)-18.4% Other (excise, customs, etc)105,33599,269(6,066)-5.76% Total$2,524,000$2,104,600($419,400)-16.62%

Explaining the Deficit Budget Reconciliation Change Percent Change Tax Revenues (previous slide)2,524,0002,104,600(419,400)-16.62% Expenditures: HHS (Medicare, Medicaid)653,924729,62175, % Dep’t of the Treasury (TARP)534,707708,546174, % Social Security Administration605,668666,31460, % Dep’t of Defense (Iraq, Afghanistan)542,656576,44333, % Dep’t of Labor (unemployment)53,313123,47470, % Dep’t of Agriculture (food stamps)84,515105,27620, % HUD (FHA losses)45,67557,98312, % Homeland Security (disaster relief, border patrol) 36,51547,34410, % Defense Civil Programs (Military Ret.)41,90952,37410, % All other383,718450,82567, % Deficit(458,600)(1,413,600)(955,000)208.24%

Present Value of “Social Insurance” Liabilities Projected Over Next 75 Years “Social Insurance” programs account for just over 40% of the budget As of the end of fiscal year 2009, the estimated net present value liability associated with these programs was $45 trillion:  Medicare – $38 trillion** (before HCR)  SS – $7.6 trillion 2009 GDP = $ trillion Source: Fiscal Year 2009 Financial Report of the United States, p. xiii (

Present Value of “Social Insurance” Liabilities (cont) PV of Projected GDP over next 75 years = $776 T Net PV excess “Social Insurance” expenditures – 5.8% projected PV GDP  Social Security deficit – 1% GDP over next 75 years  Medicare deficit – 4.8% GDP over next 75 years  Medicare shortfall is almost 500% of SS shortfall in relative terms (as of FYE 2009)

Overview Social Security as of FYE 2009 Total Beneficiaries – 53 million Retirees – 36 million Survivors – 6 million Disabled workers – 10 million Employees paying into system – 136 million Source: 2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (

Overview (cont) Total Revenues – $807 billion Taxes (12.4% taxable payroll) – $689 billion Interest ($2.5 trillion in Treasury bonds) – $118 billion Total Expenditures – $686 billion Source: 2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds ( Note that figures do not tie to CBO’s historical figures (

Social Security Surpluses vs. Operating Deficit It has not always been this way … The cumulative Social Security surplus for the period 1990—2009 was $2.5 trillion This represents around 23% of the total government debt ($11 Trillion) as of the end of fiscal year 2009

Annual Cost of SS Benefits 2009 – benefits paid = 4.8% of GDP 2009 – SS tax revenues = 5.76% of GDP 2035 – projected benefits = 6.1% of GDP After 2035, costs projected to decline to 5.9 % of GDP

“Fixing” Social Security Cost Factors: Retirement age Life expectancy Choice of inflation index (wage inflation is about 30% less than CPI) Revenue Factors: Tax rate Tax base Earnings ceiling S corp pass-through income “Carried interest” (e.g., hedge fund manager salaries) Immigration Taxation of benefits to recipients

Example: Lifting the Earnings Cap? In 2007 (most recent data available), eliminating the cap on wages subject to FICA taxes would have increased tax revenues by $312 billion (enough to eliminate the 2008 total budget deficit) Eliminating FICA on the first 20,000 of wages that year would have cost $69 billion in lost revenue Thus, we could have increased tax revenues in 2007 by about $243 billion by eliminating FICA on the first $20,000 of wages, and eliminating the earnings cap on wages subject to FICA

SSA Projections Annual cost rate:  2010 – 13.09% of “taxable payroll”  2035 – 17.43% of “taxable payroll” Current tax rate (combined) – 15.3% of “taxable payroll”

SSA Projections For 75-year projection period, the shortfall in SS could be eliminated by:  Immediately reducing benefits by 12%  Increasing combined tax rate immediately by 1. 84%  This would absorb about 5.9% of projected real wage growth over next 30 years  Note that rate increases over the past 30 years absorbed 6.8% of real wage growth  SS Trustees Report for 2010 projects average real wage in 30 years will be 48.7% higher than today

Overview 2010 Medicare Trustees Report Outlook “substantially” improved as a result of HCR:  HI Trust Fund solvency extended 12 years to 2029  75-year HI shortfall reduced to 0.66% of “taxable payroll” vs. 3.88% in 2009  Note that taxable payroll is different for Medicare than for Social Security

How HCR Reduces Projected Medicare Shortfall Medicare reimbursement inflation adjustment: Reduced to rate of “total economy multifactor productivity growth” Does not apply to physicians’ services or drugs Rationale: future growth in healthcare costs will not be allowed to exceed productivity growth in broader economy

Medicare Trustee Projections Hospital Insurance Trust Fund (HI) Deficit 0.66% of “taxable payroll” Note that there is no earnings ceiling on Medicare payroll tax Beginning in 2029, dedicated revenues projected to be equal to 85% of HI costs and will decline slowly from there Over 75 years, HI shortfall projected to be equal to: 23% of Medicare payroll taxes 16% of HI program costs

Medicare Trustee Projections Medicare, Part B (SMI) – pays doctors’ bills and other outpatient expenses Medicare, Part D – pays for prescription drugs Combined cost = 1.9% of GDP in 2009 Projected cost 2040: 3.5% of GDP We have more work to do with regard to controlling prices for prescription drugs

Immediate Issue: Should we Extend the Tax Cuts? CBO Budget Projections if Tax Cuts Expire and HCR Unchanged

Extending the Tax Cuts CBO Projections Assuming Tax Cuts will be Extended and HCR Reforms will not be Fully Implemented

Gouging the Rich? Comparing effective total (state & federal) tax rates: Source IRS 2008 individual income tax returns All itemizers Itemized deductions claimed for sales, property, state income and other taxes Total federal income tax paid, including AMT, after allowable tax credits FICA taxes paid conservatively estimated based on total salaries reported, assuming two workers with equal pay.

Effective Total Tax Rates Local, State & Federal (incl. FICA) U.S. Itemizers Adjusted Gross Income Pct of Itemizers Share of AGI Effective Total Tax Rate Bottom 90% Zero to $25,000 $25,000 to $50,000 $50,000 to $75,000 $75,000 to $100,000 $100,000 to $200,000 Cumulative Total 9.23% 20.15% 20.55% 16.70% 24.71% 91.34% 1.19% 6.46% 10.76% 12.20% 27.96% 58.51% 49.45% 34.43% 32.56% 32.11% 33.52% 34.86% $200,000 and above $200,000 to $500,000 $500,000 to $1,000,000 Cumulative Total 6.88% 1.14% 8.02% 16.54% 6.54% 23.08% 35.44% 31.75% 34.91% Top 1% $1,000,000 to $1,500,000 $1,500,000 to $2,000,000 $2,000,000 to $5,000,000 $5,000,000 to $10,000,000 $10,000,000 or more Cumulative Total 0.28% 0.12% 0.17% 0.04% 0.03% 0.64% 2.85% 1.72% 4.37% 2.50% 6.90% 18.41% 29.62% 28.55% 27.38% 25.71% 22.95% 28.26%