June 27, 2008
By Stuart M. Butler, Ph.D.
Congress's nonpartisan official "scorekeeper," the Congressional Budget Office (CBO), was recently asked by Representative Paul Ryan (R–WI) to estimate the impact of raising marginal tax rates to pay for the projected huge increase in entitlement spending in future decades. The CBO concludes that:
The CBO was asked to evaluate raising tax revenues as an option to address the huge projected spending and deficits in future years, even though under current law, taxes will rise to record levels as a percent of gross domestic product (GDP).
Spending Under Current Law
As background to its estimates, the CBO notes that spending on Medicare, Medicaid, and Social Security will rise rapidly in the future, pushing up "primary" federal spending (excluding interest payments on the debt) from 18.2 percent of GDP today to 28.3 percent in 2050 and 35.3 percent in 2082. With interest payments included, spending will hit 41.8 percent of GDP in 2050 and 75.4 percent by 2082.
The CBO explains that, if no action is taken to address this and deficits soar to expected levels, "the economy will eventually suffer serious damage."
The Impact of Raising Taxes
The CBO was also asked to examine the economic effects of closing the projected future deficits with an across-the-board increase in individual and corporate marginal income tax rates. In its response, the CBO assumes that no new future programs will be enacted by Congress. (Obviously, assuming any new programs would have required the CBO to increase the needed revenue.)
According to the CBO:
The CBO also explored a more optimistic scenario by assuming that primary federal spending (excluding interest payments on the debt) would somehow be held constant at 28 percent of GDP after 2030 instead of rising to more than 35 percent of GDP. On this assumption, the CBO estimates that individual marginal tax rates would still need to increase sharply: The 10 percent rate bracket would increase to 19 percent, the 25 percent bracket would increase to 47 percent, and the 35 percent bracket would rise to 66 percent. The top corporate rate also would need to be raised to 66 percent.
The CBO modeled the economic impact of this more optimistic view of future spending and concludes that:
Under this scenario, real GNP [gross national product] per person in 2050 could be between 5 percent and 20 percent less that what it would be if revenues and spending in 2050 were the same shares of GDP as in 2007.
Some Further Points
It is important to remember that in these projections, the CBO:
The CBO's letter on the tax increases needed to pay for future projected entitlement spending is another dire warning to Congress that it should deal quickly with the unsustainable promises associated with the major entitlement programs. Already, three former CBO directors and many other budget analysts from across the political spectrum have urged a fundamental restructuring of these programs, both to avert an economic crisis and to avoid placing an unacceptable burden on future generations.
Yet proposals abound in Congress and on the campaign trail to create new entitlements and to raise taxes to pay for them in addition to the steadily rising tax burdens built into current law. These new entitlements and proposed tax increases would be on top of the levels that the CBO's letter says would "probably not be economically feasible."
It is time for those who argue that we do not need to renegotiate the promises made in today's entitlements to explain to Americans that their children and grandchildren will face the huge marginal tax rates indicated by the CBO. It is also time for those who advocate increased spending commitments financed by increased tax rates to explain to the American people that future rates would be even higher under their proposals.
Stuart M. Butler, Ph.D., is Vice President for Domestic and Economic Policy Studies at The Heritage Foundation.
Show references in this report
 Peter R. Orszag, Director, Congressional Budget Office, letter to Representative Paul Ryan (R–WI), May 19, 2008, at http://www.cbo.gov/ftpdocs/92xx/doc9216/05-19-LongtermBudget_Letter-to-Ryan.pdf (June 24, 2008).
 Ibid., pp. 8–9.
 Ibid., p. 10.
 Ibid., p. 8.
 Ibid., pp. 8–9 (emphasis added).
 Ibid., p. 10. Gross national product (GNP) and GDP differ slightly as measures of national income. GDP is the total value of goods and services produced within the United States, which includes goods and services produced domestically for which revenue goes to foreign owners. It excludes the value of goods and services produced abroad by American firms. GNP, on the other hand, measures the value of all production and services by U.S. residents.
 See Joseph Antos et al., "Taking Back Our Fiscal Future"Brookings Institution and The Heritage Foundation White Paper, April 2008, at http://www.heritage.org/Research/Budget/wp0408.cfm.
 Orszag, letter to Representative Ryan, p. 9.
Entitlements, Taxes & Spending Initiative of the Leadership for America Campaign
Stuart M. Butler, Ph.D.
Distinguished Fellow and Director, Center for Policy Innovation
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