The government will have to borrow nearly 50 cents for every dollar it spends this year, exploding the record federal deficit past $1.8 trillion under new White House estimates.
Thursday, February 26th, 2009 at 7:29 pm Clearing up a misconception: “tax hikes during a recession?” Peter Orszag, Director
One of the questions I received throughout the day today, as we released the Fiscal Year 2010 budget, is why we are proposing to raise taxes on high-income taxpayers during a recession. And the answer is simple: we’re not.
First, the Recovery Act that was enacted earlier this month included $288 billion in tax reductions, as part of an overall effort to bolster the economy and help to fill in the "GDP gap" (the gap between how much the economy could produce and how much it is current producing). During a recession, we’re cutting taxes.
Second, as the economy recovers, we will need to begin bringing down the budget deficit to avoid a fiscal crisis in the future. So as we come out of the recession, and consistent with the President’s campaign proposals, the Budget combines spending reductions and revenue increases – with the revenue increases applying to high-income taxpayers (those with incomes of $250,000 or more) and corporations. The roughly $2 trillion in deficit reduction that the Budget contains for the next decade is split evenly between spending reductions (of roughly $1 trillion) and revenue increases (of roughly $1 trillion).
Let’s focus specifically on the revenue increases for high-income taxpayers. The Budget proposes that the tax cuts currently enjoyed by those with incomes above $250,000 be allowed to expire at the beginning of 2011, at which point the economy should have recovered from the current downturn. Again, the revenue increases for those with incomes of $250,000 or more a year would become effective January 1, 2011 – and not before.*
Finally, even after the economy recovers, the Budget proposes making the Making Work Pay tax credit permanent – which would provide a tax cut for 95 percent of working families. And the Budget includes other tax cuts as well, such as expanding the Savers Credit.
The bottom line is that despite what some people are saying, no tax increases would take effect during the recession. And even after the recession ends, 95 percent of working families would continue to enjoy tax cuts.
*For those who want to see that in the numbers, take a look at Table S-6 (pdf) on page 123 in the budget overview we just released (pdf). The changes to the top marginal tax rates and other provisions affecting high-income taxpayers do not take effect until January 2011 – which is why there are little or no revenue effects until fiscal year 2011. (The small changes in revenue from capital gains and dividends in 2010 reflect modest assumed shifts in behavior in anticipation of the tax changes taking effect at the beginning of the following year.)
Saturday, February 28th, 2009 at 3:19 pm Economic forecasts and the Budget: Consistency with CBO Peter Orszag, Director
During last Thursday’s briefing on the President’s FY 2010 Budget, CEA Chair Christina Romer was asked many questions about the economic forecast underlying the Budget – and since then some news reports have highlighted differences between the Administration’s forecast and the Congressional Budget Office (CBO) forecast.
The problem with this comparison is that our forecast includes the effects of the American Recovery and Reinvestment Act, which has now been signed into law. The CBO forecast, by contrast, was published in January and did not take into account the effects of the Recovery Act.
To put the forecasts on an "apples-to-apples" basis, one can take the CBO forecast and add in the effects from CBO’s macroeconomic analysis of the Recovery Act—which included both a "high" and "low" estimate for the projected effect of the act. (See http://www.cbo.gov/ftpdocs/99xx/doc9987/Gregg_Year-by-Year_Stimulus.pdf.) The results show that the Administration’s GDP forecast is entirely consistent with CBO’s forecast (and indeed right in the middle of CBO’s "high" and "low" estimates) once the effects of the Recovery Act are included. The table below presents the GDP projections on this "apples-to-apples" basis.
Projected Real GDP Levels (Calendar Years, in 2000 dollars)
CBO with "High" Effect of Recovery Act* 2009 2010 11,624 11,983
CBO with "Low" Effect of Recovery Act*
2009 2010 11,487 11,720
Administration Forecast 2009 2010 11,527 11,893
*Estimates based on published CBO projections
Corrected, 3/2/09
Since the time when both the Administration and the CBO forecasts were completed, incoming data suggest that the economy was even weaker at the end of last year than previously understood – underscoring the magnitude of the economic crisis inherited by the Administration and the need for the Recovery Act enacted earlier this month.
One of the interesting things I heard at a recent conference is that our current federal tax system is not efficient enough to raise enough revenue to offset these deficits.
Instead, the speaker, a former CBO director, predicted that we would see a consumption or VAT tax added to the federal system.
http://www.pbs.org/wgbh/pages/frontline/tentrillion/
ReplyDeleteThursday, February 26th, 2009 at 7:29 pm
ReplyDeleteClearing up a misconception: “tax hikes during a recession?”
Peter Orszag, Director
One of the questions I received throughout the day today, as we released the Fiscal Year 2010 budget, is why we are proposing to raise taxes on high-income taxpayers during a recession. And the answer is simple: we’re not.
First, the Recovery Act that was enacted earlier this month included $288 billion in tax reductions, as part of an overall effort to bolster the economy and help to fill in the "GDP gap" (the gap between how much the economy could produce and how much it is current producing). During a recession, we’re cutting taxes.
Second, as the economy recovers, we will need to begin bringing down the budget deficit to avoid a fiscal crisis in the future. So as we come out of the recession, and consistent with the President’s campaign proposals, the Budget combines spending reductions and revenue increases – with the revenue increases applying to high-income taxpayers (those with incomes of $250,000 or more) and corporations. The roughly $2 trillion in deficit reduction that the Budget contains for the next decade is split evenly between spending reductions (of roughly $1 trillion) and revenue increases (of roughly $1 trillion).
Let’s focus specifically on the revenue increases for high-income taxpayers. The Budget proposes that the tax cuts currently enjoyed by those with incomes above $250,000 be allowed to expire at the beginning of 2011, at which point the economy should have recovered from the current downturn. Again, the revenue increases for those with incomes of $250,000 or more a year would become effective January 1, 2011 – and not before.*
Finally, even after the economy recovers, the Budget proposes making the Making Work Pay tax credit permanent – which would provide a tax cut for 95 percent of working families. And the Budget includes other tax cuts as well, such as expanding the Savers Credit.
The bottom line is that despite what some people are saying, no tax increases would take effect during the recession. And even after the recession ends, 95 percent of working families would continue to enjoy tax cuts.
*For those who want to see that in the numbers, take a look at Table S-6 (pdf) on page 123 in the budget overview we just released (pdf). The changes to the top marginal tax rates and other provisions affecting high-income taxpayers do not take effect until January 2011 – which is why there are little or no revenue effects until fiscal year 2011. (The small changes in revenue from capital gains and dividends in 2010 reflect modest assumed shifts in behavior in anticipation of the tax changes taking effect at the beginning of the following year.)
http://www.whitehouse.gov/omb/blog/09/02/26/Clearingupamisconceptiontaxhikesduringarecession/
Saturday, February 28th, 2009 at 3:19 pm
ReplyDeleteEconomic forecasts and the Budget: Consistency with CBO
Peter Orszag, Director
During last Thursday’s briefing on the President’s FY 2010 Budget, CEA Chair Christina Romer was asked many questions about the economic forecast underlying the Budget – and since then some news reports have highlighted differences between the Administration’s forecast and the Congressional Budget Office (CBO) forecast.
The problem with this comparison is that our forecast includes the effects of the American Recovery and Reinvestment Act, which has now been signed into law. The CBO forecast, by contrast, was published in January and did not take into account the effects of the Recovery Act.
To put the forecasts on an "apples-to-apples" basis, one can take the CBO forecast and add in the effects from CBO’s macroeconomic analysis of the Recovery Act—which included both a "high" and "low" estimate for the projected effect of the act. (See http://www.cbo.gov/ftpdocs/99xx/doc9987/Gregg_Year-by-Year_Stimulus.pdf.)
The results show that the Administration’s GDP forecast is entirely consistent with CBO’s forecast (and indeed right in the middle of CBO’s "high" and "low" estimates) once the effects of the Recovery Act are included. The table below presents the GDP projections on this "apples-to-apples" basis.
Projected Real GDP Levels
(Calendar Years, in 2000 dollars)
CBO with "High" Effect of Recovery Act*
2009 2010
11,624 11,983
CBO with "Low" Effect of Recovery Act*
2009 2010
11,487 11,720
Administration Forecast
2009 2010
11,527 11,893
*Estimates based on published CBO projections
Corrected, 3/2/09
Since the time when both the Administration and the CBO forecasts were completed, incoming data suggest that the economy was even weaker at the end of last year than previously understood – underscoring the magnitude of the economic crisis inherited by the Administration and the need for the Recovery Act enacted earlier this month.
http://www.whitehouse.gov/omb/blog/09/02/28/EconomicforecastsandtheBudgetConsistencywithCBO/
One of the interesting things I heard at a recent conference is that our current federal tax system is not efficient enough to raise enough revenue to offset these deficits.
ReplyDeleteInstead, the speaker, a former CBO director, predicted that we would see a consumption or VAT tax added to the federal system.