The Federal Budget and Tax Policy

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The Federal Budget and Tax Policy

• Lecture by Robert M. Coen
• Emeritus Professor of Economics
• Northwestern University
• September 29, 2009

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Federal Receipts and Expenditures(Billions of
dollars)

• Quarter Receipts Expenditures Surplus
• 2000Q1 2,032.9 1,827.7 205.2
• 2009Q2 2,214.7 3,509.6 -1,294.9
• Change 181.8 1,681.9 -1,500.1

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Estimated Federal Budget Surplus for
2009-12(Billions of dollars per year)

• Jan. 2001 est. 846
• Early 2000s downturn -291
• Bush policies -673
• (tax cuts, Iraq, drug ins.)
• Current recession -479
• Bailouts -185
• Continuing policies (e.g., war, AMT adj.) -232
• Obama stimulus -145
• Other Obama programs -56
• Current estimate -1,215
• Source David Leonhardt, New York Times, June 10,
  2009

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CBO Baseline Federal Budget Projection

• 2010-14 2010-19
• Total deficit 3,988 7,137
• ( billions)
• 2010 2014 2019
• Deficit/GDP 9.6 3.2 3.4
• (Percent)
• Debt/GDP 61.4 66.0 67.8
• (Percent)

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Total Public Debt as Percent of GDP, 2008

• France 68
• Germany 64
• Japan 173
• Sweden 37
• UK 52
• US 61
• Source CIA World Fact Book

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CBO Baseline Federal Expenditures Projection

• Change in annual expenditures, 2009 to
  2019
• (billions of
  dollars)
• Total 1,294
• Mandatory 506
• Discretionary 243
• Interest 545
• Social security 418
• Medicare 444
• Medicaid 174

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CBO Effects of Alternative Policies on
Deficit(Billions of dollars)

• 2010-14 2010-19
• Baseline deficit 3,988 7,137
• 30,000 troop reduction by 2013 -374
  -1,074
• Freeze discretionary spending -203
  -950
• Extend expiring tax cuts 1,640 4,090
• Index AMT for inflation 177
  448

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What Is Sound Budget Policy?

• False analogies to private debt
• Balance the budget?
• Balance current budget, borrow for capital
  expenditures?
• Balance the budget over business cycle?
• Keep debt/GDP ratio at safe level?
• Functional finance?

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Key Comparative Ratios2006

• Taxes Income tax Consumption
• to GDP to total tax to GDP
• France 44 49 55
• Germany 36 52 57
• Japan 28 66 56
• Sweden 49 60 46
• UK 37 58 62
• US 28 74 70
• Excluding property and social insurance taxes
• Source OECD

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How We Could Impair the Economic Well-being of
Future Generations

• Bequeathing less capital
• Bequeathing a less educated, less healthy
  workforce
• Bequeathing less scientific, engineering, and
  managerial knowledge
• Bequeathing fewer natural resources
• Accumulating foreign debt to finance current
  consumption or unprofitable investment