Charts of the day, CBO testimony edition

By Felix Salmon
September 14, 2011
Doug Elmendorf's presentation to the Joint Select Committee on Deficit Reduction.

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Two charts jump out at me from Doug Elmendorf’s presentation to the Joint Select Committee on Deficit Reduction. The first is the sheer size of various loopholes in the tax code:

loopholes.jpg

If you want to make a serious dent in long-term deficit reduction, this is a good place to start. Everybody knows that Social Security and Medicare — pensions and healthcare — comprise a massive part of the government’s future spending. What’s less well known is that pensions and healthcare are also the two biggest tax expenditures in the tax code: the deductibility of healthcare premiums will cost the government about $650 billion over five years, with the deductibility of pension contributions running it a close second. That’s over a trillion dollars in lost revenue right there. Add in the mortgage-interest deduction and the lower rates on long-term capital gains, and you get to $2 trillion pretty quickly. Double that to get a ballpark ten-year figure.

This is something that proponents of private health insurance don’t often grok: that it’s heavily subsidized by the federal government already, due to its tax-exempt status. And it stands to reason that if the government is going to spend hundreds of billions of dollars a year subsidizing private health insurance, then it ought at the very least to get some kind of control over the healthcare industry in return. If you want to keep the system fully private, then fine, but don’t ask the government for massive subsidies at the same time.

As for the tax deductibility of pension contributions, Mark Miller wrote a great post on the subject in June, in which Teresa Ghilarducci makes a very strong point.

Ghilarducci argues that retirement saving wouldn’t decline if the deduction disappeared. “There’s no evidence that it increases saving; much of the academic literature shows that higher income people are simply moving investments they would have made anyway [in taxable accounts] to a tax-preferred account. And there are 25 million taxpayers in the bottom two quartiles who don’t take deductions, so they’re getting no subsidy at all from the federal government on their contributions.”

Everybody’s talking about the necessity of making hard choices: there are lot of hard choices here which could have an enormous effect on government revenues while at the same time simplifying the tax code and even maybe allowing a reduction of the headline rate of income tax. I’m in favor of taking a whack at all of the bars on this chart, with the exception of the EITC. Doing so would make the tax system more progressive, simpler, and more lucrative. Which is exactly what we need.

So, that’s one opportunity facing the deficit committee. But here’s something scarier:

unemployment.jpg

This is the official CBO unemployment projection, on which all of its economic forecasts are based. And it shows unemployment plunging to 5% after 2015. That’s considered the long-term unemployment rate, and I guess that 2015 is considered the long term, or something. In any case, it ain’t gonna happen — there’s absolutely no reason to believe that the economy will suddenly add an enormous number of jobs in four years’ time.

As a result, actual tax revenues are going to be lower than the CBO is projecting, since the CBO is anticipating revenues from millions of people who won’t in fact be employed. And government expenditures on unemployment insurance, Medicaid, and the like will be substantially higher than the CBO is projecting.

So when we get to work on the deficit, it’s important to remember that the problem is bigger than the official CBO numbers would have you believe. Partly because the CBO is assuming things like a 30% reduction in Medicare payments for physicians’ services after 2011, which simply isn’t going to happen. And partly because the CBO is being incredibly overoptimistic on the unemployment rate. So let’s get to work on reducing the size of those loopholes. It’s the only way we can credibly free up enough money to provide the stimulus the economy needs right now.

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