1. Tax Reform in an Era of Hyper- Deficits by Jon Forman Professor in Residence IRS Office of Chief Counsel (Room 3501; 622-7639) & Alfred P. Murrah Professor of Law University of Oklahoma Norman, Oklahoma

2. 2 Overview The Budget Outlook –Short-term 2010 Federal Budget –Long-term Congressional Budget Office Government Accountability Office Fiscal Gap Taxes,Tax Expenditures, and Tax Reform

3. Projected Budget Totals Budget Totals, $billions20102010-2019 Receipts$2,381$35,250 Outlays$3,552$42,219 Deficit$1,171$ 6,969 Budget Totals, % GDP Receipts16.2%18.7% Outlays24.1%22.6% Deficit8.0%3.9% 3 Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 114 (table S-1).

4. 4 U.S. Department of the Treasury, Financial Management Service, A Citizen’s Guide to the Financial Report of the United States Government (2008), at 4. Where Does the Money Go?

5. 5 U.S. Department of the Treasury, Financial Management Service, A Citizen’s Guide to the Financial Report of the United States Government (2008), at 3.

6. Proposed Budget Receipts Receipts, $billions20102011 Individual income taxes1,0611,243 Corporation income taxes222302 Payroll taxes940995 Excise taxes7775 Estate and gift taxes2023 Custom duties and other receipts5867 Total receipts2,3812,713 Total outlays3,5523,623 Deficit, $billions1,171912 Deficit, % GDP8.0%5.9% 6 Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 119 (table S-4).

7. Deficits and Public Debt 7 Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at 114 (table S-1). Deficit200820092010201120122019 $billions4591,7521,171912581712 % GDP3.2%12.3%8.0%5.9%3.5%3.1% Public Debt $billions5,8038,3649,50910,43610,98515,370 % GDP40.8%58.7%64.6%67.3%66.7%67.2%

8. Congressional Budget Office, The Economic and Budget Outlook (November 24 2009), at 7.

9. Congressional Budget Office, Presentation to The Group of Thirty “Exit Strategy” for Fiscal Policy (December 4, 2009), at 9.

10. 10 Majority Staff, Senate Budget Committee, Brief Analysis, President Obama’s FY 2010 Budget (February 27, 2009), http://budget.senate.gov/democratic/index.html.http://budget.senate.gov/democratic/index.html

11. Department of the Treasury, Treasury Bulletin 3 (December 2009) http://fms.treas.gov/bulletin/b2009_4poe.doc. http://fms.treas.gov/bulletin/b2009_4poe.doc

12. Department of the Treasury, Treasury Bulletin 4 (December 2009) http://fms.treas.gov/bulletin/b2009_4poe.doc. http://fms.treas.gov/bulletin/b2009_4poe.doc

13. 13 U.S. Department of the Treasury, Financial Management Service, A Citizen’s Guide to the Financial Report of the United States Government (2008), at 7.

14. U.S. Government Accountability Office, The Federal Government’s Long-Term Fiscal Outlook: Fall 2009 Update (GAO-10-137SP, 2009), at 5.

15. 15 Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2008 to 2018 (January 23, 2008), Charts at 13.

16. 16 U.S. Government Accountability Office, Saving Our Future Requires Tough Choices Today (GAO-08-465CG, January 14, 2008), at 5

17. 17 U.S. Government Accountability Office, Saving Our Future Requires Tough Choices Today (GAO-08-465CG, January 14, 2008), at 6

18. Why the Fiscal Gap? Aging of American Health Expenditures 18

19. Congressional Budget Office, Presentation to The Group of Thirty “Exit Strategy” for Fiscal Policy (December 4, 2009), at 11.

20. 20 Jonathan Barry Forman & Yung-Ping [Bing] Chen, Optimal Retirement Age, in New York University Review of Employee Benefits and Compensation—2008, Volume II, Chapter 14 (2008).

21. 21

22. 22 Jonathan Barry Forman & Yung-Ping [Bing] Chen, Optimal Retirement Age, in New York University Review of Employee Benefits and Compensation—2008, Volume II, Chapter 14 (2008).

23. 23 U.S. Department of the Treasury, Financial Management Service, Financial Report of the United States Government (2008), at 122.

24. 24 Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2008 to 2018 (January 23, 2008), Charts at 12.

25. 25 Congressional Budget Office, Growth in Health Care Costs (January 31, 2008), Charts at 8.

26. Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security (percentage of GDP) Congressional Budget Office, The Long-Term Budget Outlook (June 2009), at 12 (Box 1-2).

27. 27 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 $13.6 3.2 1.1 Over the next 75 years 4.3 1.6.6 2008 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, Table IV.B6.

28. 28 Medicare 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 $34.4 6.1 2.6 Over the next 75 years 12.4 3.4 1.6 2008 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, Table III.B10.

29. 29 U.S. Department of the Treasury, Financial Management Service, A Citizen’s Guide to the Financial Report of the United States Government (2008), at 8.

30. 30 Clearly Revenues Will Be Needed in the Future Tax Expenditures What Is the Best Tax Base?

31. Federal Revenues by Source, 1940-2014 (Millions of dollars) Fiscal YearIndividual Income Taxes Corporate Income Taxes Social Insurance and Retirement Receipts Excise Taxes OtherTotal Receipts 1940 8921,1971,7851,9776986,548 196040,71521,49414,68311,6763,92392,492 1980244,06964,600157,80324,32926,311517,112 20001,004,462207,289652,85268,86591,7502,025,218 20081,145,747304,346900,15567,334106,7442,524,326 2014 estimate1,612,672420.2381,166,60979,021201,5843,480,124 Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009), at Historical Tables (table 2.1).

33. 33 Principles to Guide Tax Reform 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

34. 34 Tax Base Income Consumption Earnings Wealth

35. 35 Top 10 Income Tax Expenditures, 2009 (Billions of Dollars) Health insurance exclusion $168 Mortgage interest deduction 101 401(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 34 2009 Federal Budget, Analytical Perspectives, Chapter 19, Tax Expenditures, Table 19-3

36. 36 Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009).

37. 37 Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009).

38. How an Integrated Tax & Transfer System Would Affect a Single Parent with 2 Children ($2,000 Personal Tax Credits, $2,000 per Worker Credits, and 20 & 35% Tax Rates) Pre-transfer earnings Plus personal tax credits Plus worker credit Less tax imposed After-tax income 0 $6,000 0 0 $10,000 $6,000$2,000 $16,000 $20,000 $6,000$2,000 $4,000 $24,000 $50,000 $6,000$2,000 $10,000 $48,000 $100,000 $6,000$2,000 $27,500 $80,500 $200,000 $6,000$2,000 $62,500$145,500 38

39. 39

40. Consumption Tax Options Progressive Personal Consumption Tax Subtraction method Value Added Tax –Treasury Department proposal for Business Activity Tax (BAT) Credit-method (European style) VAT National retail sales tax (RST) Charles E. McClure, Jr., Why the United States Needs a Value Added Tax (2009).

42. 42 Conclusion President needs 60 votes in the U.S. Senate –The whole tax and benefit system is in play And will be in play for years –The lobbyists will be tripping over each other Change is almost always incremental

43. About the Author Jonathan Barry Forman (“Jon”) is –the Professor in Residence at the Internal Revenue Service Office of Chief Counsel, Washington, DC, for the 2009-2010 academic year; –the Alfred P. Murrah Professor of Law at the University of Oklahoma College of Law, teaching tax and pension law; 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 master’s degrees in both economics and psychology. Jon can be reached at jforman@ou.edu, 405-325-4779jforman@ou.edu Slides, etc. at www.law.ou.edu/faculty/forman.shtmlwww.law.ou.edu/faculty/forman.shtml 43