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United States federal budget

United States federal budget

Overview


The Budget of the United States Government is the President
President of the United States
The President of the United States of America is the head of state and head of government of the United States. The president leads the executive branch of the federal government and is the commander-in-chief of the United States Armed Forces....

's proposal to the U.S. Congress which recommends funding levels for the next fiscal year, beginning October 1. Congressional decisions are governed by rules and legislation regarding the federal budget process
United States budget process
The process of creating the budget for the United States government is known as the budget process. The framework used by Congress to formulate the budget was established by the Budget and Accounting Act of 1921, the Congressional Budget and Impoundment Control Act of 1974, and by other budget...

. Budget committees set spending limits for the House and Senate committees and for Appropriations subcommittees, which then approve individual appropriations bills to allocate funding to various federal programs.

After Congress approves an appropriations bill, it is sent to the President, who may sign it into law, or may veto it.
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The Budget of the United States Government is the President
President of the United States
The President of the United States of America is the head of state and head of government of the United States. The president leads the executive branch of the federal government and is the commander-in-chief of the United States Armed Forces....

's proposal to the U.S. Congress which recommends funding levels for the next fiscal year, beginning October 1. Congressional decisions are governed by rules and legislation regarding the federal budget process
United States budget process
The process of creating the budget for the United States government is known as the budget process. The framework used by Congress to formulate the budget was established by the Budget and Accounting Act of 1921, the Congressional Budget and Impoundment Control Act of 1974, and by other budget...

. Budget committees set spending limits for the House and Senate committees and for Appropriations subcommittees, which then approve individual appropriations bills to allocate funding to various federal programs.

After Congress approves an appropriations bill, it is sent to the President, who may sign it into law, or may veto it. A vetoed bill is sent back to Congress, which can pass it into law with a two-thirds majority in each chamber. Congress may also combine all or some appropriations bills into an omnibus reconciliation bill. In addition, the president may request and the Congress may pass supplemental appropriations bills or emergency supplemental appropriations bills.

Several government agencies provide budget data and analysis. These include the Government Accountability Office
Government Accountability Office
The Government Accountability Office is the audit, evaluation, and investigative arm of the United States Congress. It is located in the legislative branch of the United States government.-History:...

 (GAO), Congressional Budget Office
Congressional Budget Office
The Congressional Budget Office is a federal agency within the legislative branch of the United States government that provides economic data to Congress....

, the Office of Management and Budget (OMB) and the U.S. Treasury Department. These agencies have reported that the federal government is facing a series of important financing challenges. In the short-run, tax revenues have declined significantly due to a severe recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...

 and tax policy choices, while expenditures have expanded for wars, unemployment insurance and other safety net spending. In the long-run, expenditures related to healthcare programs such as Medicare
Medicare (United States)
Medicare is a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 and over; to those who are under 65 and are permanently physically disabled or who have a congenital physical disability; or to those who meet other...

 and Medicaid
Medicaid
Medicaid is the United States health program for certain people and families with low incomes and resources. It is a means-tested program that is jointly funded by the state and federal governments, and is managed by the states. People served by Medicaid are U.S. citizens or legal permanent...

 are projected to grow faster than the economy overall as the population matures.

Budget principles


The U.S. Constitution (Article I
Article One of the United States Constitution
Article One of the United States Constitution describes the powers of Congress, the legislative branch of the federal government. The Article establishes the powers of and limitations on the Congress, consisting of a House of Representatives composed of Representatives, with each state gaining or...

, section 9, clause 7) states that "[n]o money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of Receipts and Expenditures of all public Money shall be published from time to time."

Each year, the President of the United States submits his budget request to Congress for the following fiscal year as required by the Budget and Accounting Act of 1921. Current law ((a)) requires the president to submit a budget no earlier than the first Monday in January, and no later than the first Monday in February. Typically, presidents submit budgets on the first Monday in February. The budget submission has been delayed, however, in some new presidents' first year when previous president belonged to a different party.

The federal budget is calculated largely on a cash basis. That is, revenues and outlays are recognized when transactions are made. Therefore, the full long-term costs of entitlement programs such as Medicare, Social Security, and the federal portion of Medicaid are not reflected in the federal budget. By contrast, many businesses and some foreign governments have adopted forms of accrual accounting, which recognizes obligations and revenues when they are incurred. The costs of some federal credit and loan programs, according to provisions of the Federal Credit Reform Act of 1990, are calculated on a net present value
Net present value
In finance, the net present value or net present worth of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values of the individual cash flows of the same entity...

 basis.

Federal agencies cannot spend money unless funds are authorized and appropriated. Typically, separate Congressional committees have jurisdiction over authorization and appropriations. The House and Senate Appropriations Committees currently have 12 subcommittees, which are responsible for drafting the 12 regular appropriations bills that determine amounts of discretionary spending for various federal programs. Appropriations bills must pass both the House and Senate and then be signed by the president in order to give federal agencies legal authority to spend. In many recent years, regular appropriations bills have been combined into "omnibus" bills.

Congress may also pass "special" or "emergency" appropriations. Spending that is deemed an "emergency" is exempt from certain Congressional budget enforcement rules. Funds for disaster relief have sometimes come from supplemental appropriations, such as after Hurricane Katrina
Hurricane Katrina
Hurricane Katrina of the 2005 Atlantic hurricane season was a powerful Atlantic hurricane. It is the costliest natural disaster, as well as one of the five deadliest hurricanes, in the history of the United States. Among recorded Atlantic hurricanes, it was the sixth strongest overall...

. In other cases, funds included in emergency supplemental appropriations bills support activities not obviously related to actual emergencies, such as parts of the 2000 Census of Population and Housing
United States Census, 2000
The Twenty-second United States Census, known as Census 2000 and conducted by the Census Bureau, determined the resident population of the United States on April 1, 2000, to be 281,421,906, an increase of 13.2% over the 248,709,873 persons enumerated during the 1990 Census...

. Special appropriations have been used to fund most of the costs of war and occupation in Iraq and Afghanistan
War in Afghanistan (2001–present)
The War in Afghanistan began on October 7, 2001, as the armed forces of the United States of America, the United Kingdom, Australia, and the Afghan United Front launched Operation Enduring Freedom...

 so far.

Budget resolutions and appropriations bills, which reflect spending priorities of Congress, will usually differ from funding levels in the president's budget. The president, however, retains substantial influence over the budget process through his veto power and through his congressional allies when his party has a majority in Congress.

Federal budget data


Several government agencies provide budget data. These include the Government Accountability Office
Government Accountability Office
The Government Accountability Office is the audit, evaluation, and investigative arm of the United States Congress. It is located in the legislative branch of the United States government.-History:...

 (GAO), the Congressional Budget Office
Congressional Budget Office
The Congressional Budget Office is a federal agency within the legislative branch of the United States government that provides economic data to Congress....

, the Office of Management and Budget (OMB) and the U.S. Treasury Department. The CBO publishes The Budget and Economic Outlook in January, which is typically updated in August. It also publishes a Monthly Budget Review. The OMB, which is responsible for organizing the President's budget presented in February, typically issues a budget update in July. The GAO and the Treasury issue Financial Statements of the U.S. Government, usually in the December following the close of the federal fiscal year, which occurs September 30. There is a corresponding Citizen's Guide, a short summary. The Treasury Department also produces a Combined Statement of Receipts, Outlays, and Balances each December for the preceding fiscal year, which provides detailed data on federal financial activities.
Historical tables within the President's Budget (OMB) provide a wide range of data on federal government finances. Many of the data series begin in 1940 and include estimates of the President’s Budget for 2009–2014. Additionally, Table 1.1 provides data on receipts, outlays, and surpluses or deficits for 1901–1939 and for earlier multi-year periods. This document is composed of 17 sections, each of which has one or more tables. Each section covers a common theme. Section 1, for example, provides an overview of the budget and off-budget totals; Section 2 provides tables on receipts by source; and Section 3 shows outlays by function. When a section contains several tables, the general rule is to start with tables showing the broadest overview data and then work down to more detailed tables. The purpose of these tables is to present a broad range of historical budgetary data in one convenient reference source and to provide relevant comparisons likely to be most useful. The most common comparisons are in terms of proportions (e.g., each major receipt category as a percentage of total receipts and of the gross domestic product).

Federal budget projections


The CBO calculates 35-year baseline projections, which are used extensively in the budget process. Baseline projections are intended to reflect spending under current law, and are not intended as predictions of the most likely path of the economy. During the George W. Bush Administration, the OMB presented five-year projections, but presented 45-year projections in the FY2010 budget submission. The CBO and the GAO issue long-term projections from time to time.

Major receipt categories


During FY 2010, the federal government collected approximately $2.16 trillion in tax revenue. Primary receipt categories included individual income taxes (42%), Social Security/Social Insurance taxes (40%), and corporate taxes (9%). Other types included excise, estate and gift taxes.

Tax revenues have averaged approximately 18.3% of gross domestic product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....

 (GDP) over the 1970-2009 period, generally ranging plus or minus 2% from that level. Tax revenues are significantly affected by the economy. Recessions typically reduce government tax collections as economic activity slows. For example, tax revenues declined from $2.5 trillion in 2008 to $2.1 trillion in 2009, and remained at that level in 2010. During 2009, individual income taxes declined 20%, while corporate taxes declined 50%. At 14.9% of GDP, the 2009 and 2010 collections were the lowest level of the past 50 years.

Tax policy



Tax descriptions


The federal personal income tax is progressive
Progressive tax
A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...

, meaning a higher marginal tax rate is applied to higher ranges of income. For example, in 2010 the tax rate that applied to the first $17,000 in taxable income for a couple filing jointly was 10%, while the rate applied to income over $379,150 was 35%. The top marginal tax rate has declined considerably since 1980. For example, the top tax rate was lowered from 70% to 50% in 1980 and reached as low as 28% in 1988. The most recent changes were the Bush tax cuts
Bush tax cuts
The Bush tax cuts refers to changes to the United States tax code passed during the presidency of George W. Bush and extended during the presidency of Barack Obama that generally lowered tax rates and revised the code specifying taxation in the United States...

 of 2001 and 2003, extended by President Obama in 2010, which lowered the top rate from 39.6% to 35%. There are numerous exemptions and deductions, that typically result in a range of 35-40% of U.S. households owing no federal income tax. The recession and tax cut stimulus measures increased this to 51% for 2009, versus 38% in 2007.

The federal payroll tax (FICA
Federal Insurance Contributions Act tax
Federal Insurance Contributions Act tax is a United States payroll tax imposed by the federal government on both employees and employers to fund Social Security and Medicare —federal programs that provide benefits for retirees, the disabled, and children of deceased workers...

) is a flat tax
Flat tax
A flat tax is a tax system with a constant marginal tax rate. Typically the term flat tax is applied in the context of an individual or corporate income that will be taxed at one marginal rate...

 used to fund Social Security and Medicare. For the Social Security portion, employers and employees each pay 6.2% of the workers gross pay, a total of 12.4%. The Social Security portion is capped at $106,800, meaning income above this amount is not subject to the tax. The Medicare portion is also paid by employer and employee each at 1.45% and is not capped. The payroll tax is considered by some to be a form of social insurance rather than a tax, due to the benefits these programs pay to qualified recipients. For calendar year 2011, the employee's portion of the payroll tax was reduced to 4.2% as an economic stimulus measure.

Tax expenditures


The term "tax expenditures" refers to income exemptions or deductions that reduce the tax collections that would be made applying a particular tax rate alone. In November 2009, The Economist
The Economist
The Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in offices in the City of Westminster, London, England. Continuous publication began under founder James Wilson in September 1843...

estimated the additional federal tax revenue generated from eliminating certain tax expenditures, for the 2013-2014 period. These included: income exemptions for employer-provided health insurance ($215 billion); and various income deductions such as mortgage interest ($147B), state & local taxes ($65B), capital gains on homes ($60B), property taxes ($33B) and municipal bond interest ($37B). These total $557 billion. All of these steps together would reduce the projected deficit at that time by nearly half.

The Congressional Joint Committee on Taxation estimated in 2008 the amount of federal tax expenditures for the five year (2008–2012) period. Examples include: Exclusions for healthcare insurance paid for by employers-$680B; reduced tax rate on dividends and long-term capital gains-$668B; deduction for mortgage interest on owner-occupied residences-$444B; exclusions for pre-tax defined benefit or defined contribution pension contributions such as to 401K plans-$554B; deductions for non-business state and local income taxes-$242B; deductions for charitable contributions-$205B; exclusion of benefits under healthcare insurance "cafeteria" plans-$201B; exclusion for interest on state and local government bonds-$147B; exclusion for Medicare benefits-$134B; deduction for real property taxes-$112B; dependent credit for children under 17 years of age-$105B; exclusion for capital gains on sale of primary residence-$90B; and deductions for long-term care and other medical expenses-$68B.

According to the Center for American Progress
Center for American Progress
The Center for American Progress is a progressive public policy research and advocacy organization. Its website states that the organization is "dedicated to improving the lives of Americans through progressive ideas and action." It has its headquarters in Washington D.C.Its President and Chief...

, annual tax expenditures have increased from $526 billion in 1982 to $1,025 billion in 2010, adjusted for inflation (measured in 2010 dollars). Economist Mark Zandi
Mark Zandi
Mark Zandi is an Iranian American economist and co-founder of Moody's Economy.com, a widely-cited source of economic analysis.. Moody's Economy.com is part of Moody's Analytics. Prior to founding Economy.com, Zandi was a regional economist at Chase Econometrics.He was born in Atlanta, Georgia of...

 wrote in July 2011 that tax expenditures should be considered a form of government spending.

U.S. taxes relative to foreign countries


Comparison of tax rates around the world
Tax rates around the world
Comparison of tax rates around the world is difficult and somewhat subjective. Tax laws in most countries are extremely complex, and tax burden falls differently on different groups in each country and sub-national unit. The graph below gives an indication by rank of some raw...

 is difficult and somewhat subjective. Tax laws in most countries are extremely complex, and tax burden falls differently on different groups in each country and sub-national units (state
State (polity)
A state is an organized political community, living under a government. States may be sovereign and may enjoy a monopoly on the legal initiation of force and are not dependent on, or subject to any other power or state. Many states are federated states which participate in a federal union...

s, counties and municipalities) and the types of services rendered through those taxes are also different.

One way to measure the overall tax burden is by looking at it as a percentage of the overall economy in terms of GDP. The Tax Policy Center
Tax Policy Center
The Tax Policy Center is a non-partisan joint venture of the Urban Institute and the Brookings Institution. Based in Washington D.C., it aims to provide independent analyses of current and longer-term tax issues and to communicate its analyses to the public and to policymakers in a timely and...

 wrote: "U.S. taxes are low relative to those in other developed countries. In 2006 U.S. taxes at all levels of government claimed 28 percent of GDP, compared with an average of 36 percent of GDP for the 30 member countries of the Organization for Economic Co-operation and Development (OECD)." Economist Simon Johnson
Simon Johnson (economist)
Simon Johnson is a British American economist. He is the 'Ronald A. Kurtz Professor of Entrepreneurship at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. He has held a wide variety of academic and policy-related positions, including...

 wrote in 2010: "The U.S. government doesn’t take in much tax revenue -- at least 10 percentage points of GDP less than comparable developed economies -- and it also doesn’t spend much except on the military, Social Security and Medicare." A comparison of taxation on individuals amongst OECD countries shows that the U.S. tax burden is just slightly below the average tax for middle income earners.

Deficit spending can distort the true total effective taxation. One way to mitigate this distortion is to evaluate spending levels. This approach shows the level of services a country is willing to accept versus what they are willing to pay. In 2010, the Federal government of the USA spent an average of $11,041 per citizen (per capita). This compares to the 2010 World average spending of $2376 per citizen and an average of $16,110 per citizen for the World's 20 largest economies (in terms of GDP). Of the 20 largest economies, only six spent less per citizen: South Korea
South Korea
The Republic of Korea , , is a sovereign state in East Asia, located on the southern portion of the Korean Peninsula. It is neighbored by the People's Republic of China to the west, Japan to the east, North Korea to the north, and the East China Sea and Republic of China to the south...

 ($4557), Brazil
Brazil
Brazil , officially the Federative Republic of Brazil , is the largest country in South America. It is the world's fifth largest country, both by geographical area and by population with over 192 million people...

 ($2813), Russia
Russia
Russia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...

 ($2458), China
China
Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...

 ($1010), and India
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...

 ($$226). Of the 13 that spent more, Norway
Norway
Norway , officially the Kingdom of Norway, is a Nordic unitary constitutional monarchy whose territory comprises the western portion of the Scandinavian Peninsula, Jan Mayen, and the Arctic archipelago of Svalbard and Bouvet Island. Norway has a total area of and a population of about 4.9 million...

 and Sweden
Sweden
Sweden , officially the Kingdom of Sweden , is a Nordic country on the Scandinavian Peninsula in Northern Europe. Sweden borders with Norway and Finland and is connected to Denmark by a bridge-tunnel across the Öresund....

 top the list with per citizen spending of $40908 and $26760 respectively.

In comparing corporate taxes, the Congressional Budget Office
Congressional Budget Office
The Congressional Budget Office is a federal agency within the legislative branch of the United States government that provides economic data to Congress....

 found in 2005 that the top statutory tax rate was the third highest among OECD countries behind Japan and Germany. However, the U.S. ranked 27th lowest of 30 OECD countries in its collection of corporate taxes relative to GDP, at 1.8% vs. the average 2.5%. Bruce Bartlett
Bruce Bartlett
Bruce Bartlett is an American historian who turned to writing about supply-side economics. He was a domestic policy adviser to President Ronald Reagan and was a Treasury official under President George H.W. Bush....

 wrote in May 2011: "...one almost never hears that total revenues are at their lowest level in two or three generations as a share of G.D.P. or that corporate tax revenues as a share of G.D.P. are the lowest among all major countries. One hears only that the statutory corporate tax rate in the United States is high compared with other countries, which is true but not necessarily relevant. The economic importance of statutory tax rates is blown far out of proportion by Republicans looking for ways to make taxes look high when they are quite low."

Major expenditure categories


The federal government's expenditures in FY2010 included Medicare & Medicaid ($793B or 23%), Social Security ($701B or 20%), Defense Department ($689B or 20%), non-defense discretionary ($660B or 19%), other ($416B or 12%) and interest ($197B or 6%). Expenditures are classified as mandatory, with payments required by specific laws, or discretionary, with payment amounts renewed annually as part of the budget process. During FY 2010, the federal government spent $3.46 trillion on a budget or cash basis, down 2% vs. FY 2009 but up 16% versus FY2008 spend of $2.97 trillion. Expenditures averaged 20.6% GDP from 1971 to 2008, generally ranging +/-2% GDP from that level. In 2009 and 2010, expenditures averaged 24.4% GDP.

Mandatory spending and entitlements



Social Security
Social Security (United States)
In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program.The original Social Security Act and the current version of the Act, as amended encompass several social welfare and social insurance programs...

, Medicare
Medicare (United States)
Medicare is a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 and over; to those who are under 65 and are permanently physically disabled or who have a congenital physical disability; or to those who meet other...

, and Medicaid
Medicaid
Medicaid is the United States health program for certain people and families with low incomes and resources. It is a means-tested program that is jointly funded by the state and federal governments, and is managed by the states. People served by Medicaid are U.S. citizens or legal permanent...

 expenditures are funded by permanent appropriations and so are considered mandatory spending. Social Security and Medicare are sometimes called "entitlements," because people meeting relevant eligibility requirements are legally entitled to benefits, although most pay taxes into these programs throughout their working lives. Some programs, such as Food Stamps, are appropriated entitlements. Some mandatory spending, such as Congressional salaries, is not part of any entitlement program. Mandatory spending accounted for 53% of total federal outlays in FY2008, with net interest payments accounting for an additional 8.5%.

Mandatory spending is expected to increase as a share of GDP. This is due in part to demographic trends, as the number of workers continues declining relative to those receiving benefits. For example, the number of workers per retiree was 5.1 in 1960; this declined to 3.0 in 2010 and is projected to decline to 2.2 by 2030. These programs are also affected by per-person costs, which are also expected to increase at a rate significantly higher than the economy. This unfavorable combination of demographics and per-capita rate increases is expected to drive both Social Security and Medicare into large deficits during the 21st century. Unless these long-term fiscal imbalances are addressed by reforms to these programs, raising taxes or drastic cuts in discretionary programs, the federal government will at some point be unable to pay its obligations without significant risk to the value of the dollar (inflation).
  • Medicare was established in 1965 and expanded thereafter. In 2009, the program covered an estimated 45 million persons (38 million aged and 7 million disabled). It consists of four distinct parts which are funded differently: Hospital Insurance, mainly funded by a dedicated payroll tax of 2.9% of earnings, shared equally between employers and workers; Supplementary Medical Insurance, funded through beneficiary premiums (set at 25% of estimated program costs for the aged) and general revenues (the remaining amount, approximately 75%); Medicare Advantage, a private plan option for beneficiaries, funded through the Hospital Insurance and Supplementary Medical Insurance trust funds; and the "Part D
    Medicare Part D
    Medicare Part D is a federal program to subsidize the costs of prescription drugs for Medicare beneficiaries in the United States. It was enacted as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and went into effect on January 1, 2006.- Eligibility and...

    " prescription drug benefits, for which funding is included in the Supplementary Medical Insurance trust fund and is financed through beneficiary premiums (about 25%) and general revenues (about 75%). Spending on Medicare and Medicaid is projected to grow dramatically in coming decades. The number of persons enrolled in Medicare is expected to increase from 47 million in 2010 to 80 million by 2030. While the same demographic trends that affect Social Security also affect Medicare, rapidly rising medical prices appear to be a more important cause of projected spending increases. CBO expects Medicare and Medicaid to continue growing, rising from 5.3% GDP in 2009 to 10.0% in 2035 and 19.0% by 2082. CBO has indicated healthcare spending per beneficiary is the primary long-term fiscal challenge. Various reform strategies
    Health care reform in the United States
    Health care reform in the United States has a long history, of which the most recent results were two federal statutes enacted in 2010: the Patient Protection and Affordable Care Act , signed March 23, 2010, and the Health Care and Education Reconciliation Act of 2010 , which amended the PPACA and...

     were proposed for healthcare, and in March 2010, the Patient Protection and Affordable Care Act
    Patient Protection and Affordable Care Act
    The Patient Protection and Affordable Care Act is a United States federal statute signed into law by President Barack Obama on March 23, 2010. The law is the principal health care reform legislation of the 111th United States Congress...

     was enacted as a means of health care reform
    Health care reform in the United States
    Health care reform in the United States has a long history, of which the most recent results were two federal statutes enacted in 2010: the Patient Protection and Affordable Care Act , signed March 23, 2010, and the Health Care and Education Reconciliation Act of 2010 , which amended the PPACA and...

    .
  • Social Security is a social insurance
    Social Security (United States)
    In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program.The original Social Security Act and the current version of the Act, as amended encompass several social welfare and social insurance programs...

     program officially called "Old-Age, Survivors, and Disability Insurance" (OASDI), in reference to its three components. It is primarily funded through a dedicated payroll tax of 12.4%. During 2009, total benefits of $686 billion were paid out versus income (taxes and interest) of $807 billion, a $121 billion annual surplus. An estimated 156 million people paid into the program and 53 million received benefits, roughly 2.94 workers per beneficiary. Since the Greenspan Commission
    Greenspan Commission
    The National Commission on Social Security Reform, also known as the Greenspan Commission due to its chairmanship by Alan Greenspan, was a commission that was appointed by the United States Congress and President Ronald Reagan in 1981 to study and make recommendations regarding the short-term...

     in the early 1980s, Social Security has cumulatively collected far more in payroll taxes dedicated to the program than it has paid out to recipients—nearly $2.4 trillion by 2008. This annual surplus is credited to Social Security trust funds that hold special non-marketable Treasury securities, and this surplus amount is commonly referred to as the "Social Security Trust Fund
    Social Security Trust Fund
    In the United States, the Social Security Trust Fund is a fund operated by the Social Security Administration into which are paid contributions from workers and employers under the Social Security system and out of which benefit payments to retirees, survivors, and the disabled, and general...

    ". The proceeds are paid into the U.S. Treasury where they may be used for other government purposes. Social Security spending will increase sharply over the next decades, largely due to the retirement of the baby boom generation. The number of program recipients is expected to increase from 44 million in 2010 to 73 million in 2030. Program spending is projected to rise from 4.8% of GDP in 2010 to 5.9% of GDP by 2030, where it will stabilize. The Social Security Administration projects that an increase in payroll taxes equivalent to 1.9% of the payroll tax base or 0.7% of GDP would be necessary to put the Social Security program in fiscal balance for the next 75 years. Over an infinite time horizon, these shortfalls average 3.4% of the payroll tax base and 1.2% of GDP. Various reforms have been debated
    Social Security debate (United States)
    This article concerns proposals to change the Social Security system in the United States. Social Security is a social insurance program officially called "Old-Age, Survivors, and Disability Insurance" , in reference to its three components. It is primarily funded through a dedicated payroll tax...

     for Social Security. Examples include reducing future annual cost of living adjustments (COLA) provided to recipients, raising the retirement age, and raising the income limit subject to the payroll tax ($106,800 in 2009). Because of the mandatory nature of the program and large accumulated surplus in the Social Security Trust Fund, the Social Security system has the legal authority to compel the government to borrow to pay all promised benefits through 2037, when the Trust Fund is expected to be exhausted. Thereafter, the program under current law will pay approximately 75%-78% of promised benefits for the remainder of the century.

Other spending


  • Military spending: The military budget of the United States
    Military budget of the United States
    The military budget is that portion of the United States discretionary federal budget that is allocated to the Department of Defense, or more broadly, the portion of the budget that goes to any defense-related expenditures...

     during FY 2009 was approximately $683 billion in expenses for the Department of Defense (DoD) and $54 billion for Homeland Security, a total of $737 billion. The U.S. defense budget (excluding spending for the wars in Iraq and Afghanistan, Homeland Security, and Veteran's Affairs) is around 4% of GDP. Adding these other costs places defense and homeland security spending between 5% and 6% of GDP. The DoD baseline budget, excluding supplemental funding for the wars, has grown from $297 billion in FY2001 to a budgeted $534 billion for FY2010, an 81% increase. According to the CBO, defense spending grew 9% annually on average from fiscal year 2000-2009. Much of the costs for the wars in Iraq and Afghanistan have not been funded through regular appropriations bills, but through emergency supplemental appropriations bills. As such, most of these expenses were not included in the budget deficit calculation prior to FY2010. Some budget experts argue that emergency supplemental appropriations bills do not receive the same level of legislative care as regular appropriations bills.
  • Non-defense discretionary spending is used to fund the executive departments
    United States Federal Executive Departments
    The United States federal executive departments are among the oldest primary units of the executive branch of the federal government of the United States—the Departments of State, War, and the Treasury all being established within a few weeks of each other in 1789.Federal executive...

     (e.g., the Department of Education) and independent agencies
    Independent agencies of the United States government
    Independent agencies of the United States federal government are those agencies that exist outside of the federal executive departments...

     (e.g., the Environmental Protection Agency), although these do receive a smaller amount of mandatory funding as well. Discretionary budget authority is established annually by Congress, as opposed to mandatory spending that is required by laws that span multiple years, such as Social Security or Medicare. The federal government spent approximately $660 billion during 2010 on the Cabinet Departments and Agencies, excluding the Department of Defense, representing 19% of budgeted expenditures or about 4.5% of GDP. Several politicians and think tanks have proposed freezing non-defense discretionary spending at particular levels and holding this spending constant for various periods of time. President Obama proposed freezing discretionary spending representing approximately 12% of the budget in his 2011 State of the Union address.
  • Interest expense: Budgeted net interest on the public debt was approximately $189 billion in FY2009 (5% of spending). During FY2009, the government also accrued a non-cash interest expense of $192 billion for intra-governmental debt, primarily the Social Security Trust Fund, for a total interest expense of $381 billion. Net interest costs paid on the public debt declined from $242 billion in 2008 to $189 billion in 2009 because of lower interest rates. Should these rates return to historical averages, the interest cost would increase dramatically. Historian Niall Ferguson
    Niall Ferguson
    Niall Campbell Douglas Ferguson is a British historian. His specialty is financial and economic history, particularly hyperinflation and the bond markets, as well as the history of colonialism.....

     described the risk that foreign investors would demand higher interest rates as the U.S. debt levels increase over time in a November 2009 interview. Public debt owned by foreigners has increased to approximately 50% of the total or approximately $3.4 trillion. As a result, nearly 50% of the interest payments are now leaving the country, which is different from past years when interest was paid to U.S. citizens holding the public debt. Interest expenses are projected to grow dramatically as the U.S. debt increases and interest rates rise from very low levels in 2009 to more typical historical levels.

Understanding deficits and debt


The annual budget deficit is the difference between actual cash collections and budgeted spending (a partial measure of total spending) during a given fiscal year, which runs from October 1 to September 30. Since 1970, the U.S. federal government has run deficits for all but four years (1998–2001) contributing to a total debt of $14.0 trillion as of December 2010. The fiscal year 2010 "total budget" deficit was $1.29 trillion or 8.9% GDP, down from $1.41 trillion or 10.0% GDP in 2009. These deficits are considerably higher than pre-crisis
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....

 levels, which ranged from a $236 billion (2.4% GDP) surplus in 2000 to a $459 billion (3.2% GDP) deficit in 2008.

The national debt increase during a given year is not the same as the "total budget" deficit commonly reported, due to a variety of accounting complexities involved. These differences can make it more challenging to determine how much the government actually spends relative to tax revenues. The increase in the national debt during a given year is a helpful measure to determine this amount. From FY 2003-2007, the national debt increased approximately $550 billion per year on average. For the first time in FY 2008, the U.S. added $1 trillion to the national debt as the effects of a severe global financial crisis
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....

 became apparent. Debt increases rose to $1.88 trillion in 2009 and $1.65 trillion in 2010 as the crisis continued. In relative terms, from 2003-2007 the government spent roughly $1.20 for each $1.00 it collected in taxes. This increased to $1.40 in FY2008 and $1.90 in FY2009.

The total federal debt is divided into "debt held by the public" and "intra-governmental debt." The debt held by the public refers to U.S. government securities or other obligations held by investors (e.g., bonds, bills and notes), while Social Security and other federal trust funds are part of the intra-governmental debt. As of August 31, 2011 the total debt was $14.7 trillion, with debt held by the public of $10.0 trillion and intragovernmental debt of $4.7 trillion. Debt held by the public as a percentage of GDP rose from 34.7% in 2000 to 40.3% in 2008 and 62.1% in 2010. U.S. GDP was approximately $14.5 trillion during 2010 and an estimated $15 trillion for 2011 based on activity during the first two quarters. This means the total debt is roughly the size of GDP. Economists debate the level of debt relative to GDP that signals a "red line" or dangerous level, or if any such level exists.

The CBO reported several types of risk factors related to rising debt levels in a July 2010 publication:
  • A growing portion of savings would go towards purchases of government debt, rather than investments in productive capital goods such as factories and computers, leading to lower output and incomes than would otherwise occur;
  • If higher marginal tax rates were used to pay rising interest costs, savings would be reduced and work would be discouraged;
  • Rising interest costs would force reductions in important government programs;
  • Restrictions to the ability of policymakers to use fiscal policy to respond to economic challenges; and
  • An increased risk of a sudden fiscal crisis, in which investors demand higher interest rates.

CBO scenarios



The CBO reported during June 2011 two scenarios for how debt held by the public will change during the 2010-2035 time period. The "extended baseline scenario" assumes that the Bush tax cuts
Bush tax cuts
The Bush tax cuts refers to changes to the United States tax code passed during the presidency of George W. Bush and extended during the presidency of Barack Obama that generally lowered tax rates and revised the code specifying taxation in the United States...

 (extended by Obama) will expire per current law in 2012. It also assumes the alternative minimum tax (AMT) will be allowed to affect more middle-class families, reductions in Medicare reimbursement rates to doctors will occur, and that revenues reach 23% GDP by 2035, much higher than the historical average 18%. Under this scenario, activities such as national defense and a wide variety of domestic programs (excluding Social Security, Medicare, and interest) would decline to the lowest percentage of GDP since before World War II. Under this scenario, public debt rises from 69% GDP in 2011 to 84% by 2035, with interest payments absorbing 4% of GDP vs. 1% in 2011.

CBO estimated in August 2011 that if laws currently "on the books" were enforced without changes, meaning the "extended baseline scenario" described above is implemented along with deficit reductions from the Budget Control Act of 2011
Budget Control Act of 2011
The Budget Control Act of 2011 was passed by the 112th United States Congress signed into law by President Barack Obama. It brought conclusion to the 2011 United States debt ceiling crisis, which had threatened to lead the United States into sovereign default on or about August 3, 2011.The law...

, the deficit would decline from 8.5% GDP in 2011 to around 1% GDP by 2021.

The "alternative fiscal scenario" more closely assumes the continuation of present trends, such as permanently extending the Bush tax cuts, restricting the reach of the AMT, and keeping Medicare reimbursement rates at the current level (the so-called "doc fix", versus declining by one-third as mandated under current law). Revenues are assumed to remain around the historical average 18% GDP. Under this scenario, public debt rises from 69% GDP in 2011 to 100% by 2021 and approaches 190% by 2035.

The CBO reported in June 2011: "Many budget analysts believe that the alternative fiscal scenario presents a more realistic picture of the nation’s underlying fiscal policies than the extended-baseline scenario does. The explosive path of federal debt under the alternative fiscal scenario underscores the need for large and rapid policy changes to put the nation on a sustainable fiscal course."

CBO reported in September 2011: "The nation cannot continue to sustain the spending programs and policies of the past with the tax revenues it has been accustomed to paying. Citizens will either have to pay more for their government, accept less in government services and benefits, or both."

Overview


Many of the debates surrounding the U.S. federal budget center around competing macroeconomic schools of thought. In general, Democrats favor the principles of Keynesian economics
Keynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...

 to encourage economic growth via a mixed economy
Mixed economy
Mixed economy is an economic system in which both the state and private sector direct the economy, reflecting characteristics of both market economies and planned economies. Most mixed economies can be described as market economies with strong regulatory oversight, in addition to having a variety...

 of both private and public enterprise, a welfare state
Welfare state
A welfare state is a "concept of government in which the state plays a key role in the protection and promotion of the economic and social well-being of its citizens. It is based on the principles of equality of opportunity, equitable distribution of wealth, and public responsibility for those...

, and strong regulatory oversight. Conversely, Republicans generally support applying the principles of either laissez-faire
Laissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....

or supply-side economics
Supply-side economics
Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing...

 to grow the economy via small government, low taxes, limited regulation, and free enterprise
Free enterprise
-Transport:* Free Enterprise I, a ferry in service with European Ferries between 1962 and 1980.* Free Enterprise II, a ferry in service with European Ferries between 1965 and 1982....

. Debates have surrounded the appropriate size and role of the federal government since the founding of the country. These debates also deal with questions of morality, income equality
Income equality
Income equality is discussed in the following articles:* List of countries by income equality* Economic egalitarianism...

 and intergenerational equity
Intergenerational equity
Intergenerational equity in economic, psychological, and sociological contexts, is the concept or idea of fairness or justice in relationships between children, youth, adults and seniors, particularly in terms of treatment and interactions. It has been studied in environmental and sociological...

. For example, Congress adding to the debt today may or may not enhance the quality of life for future generations, who must also bear the additional interest and taxation burden.

Cause of decline in U.S. financial position


Both economic conditions and policy decisions significantly worsened the debt outlook since 2001, when large surpluses were forecast for the following decade by the CBO. The Pew Center reported in April 2011 the cause of a $12.7 trillion shift in the debt situation, from a 2001 CBO forecast of $2.3 trillion cumulative surplus by 2011 versus the estimated $10.4 trillion public debt in 2011. The major drivers were:
  • Revenue declines due to two recessions, separate from the Bush tax cuts of 2001 and 2003: 28%
  • Defense spending increases: 15%
  • The Bush Tax cuts
    Bush tax cuts
    The Bush tax cuts refers to changes to the United States tax code passed during the presidency of George W. Bush and extended during the presidency of Barack Obama that generally lowered tax rates and revised the code specifying taxation in the United States...

     (EGTRRA-2001 and JGTRRA-2003): 13%
  • Increases in net interest: 11%
  • Other non-defense spending: 10%
  • Other tax cuts: 8%
  • Obama Stimulus: 6%
  • Medicare Part D: 2%
  • Other reasons: 7%


Similar analyses were reported by the New York Times in June 2009, the Washington Post in April 2011 and the Center on Budget and Policy Priorities in May 2011. Economist Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...

 wrote in May 2011: "What happened to the budget surplus the federal government had in 2000? The answer is, three main things. First, there were the Bush tax cuts, which added roughly $2 trillion to the national debt over the last decade. Second, there were the wars in Iraq and Afghanistan, which added an additional $1.1 trillion or so. And third was the Great Recession, which led both to a collapse in revenue and to a sharp rise in spending on unemployment insurance and other safety-net programs." A Bloomberg analysis in May 2011 attributed $2.0 trillion of the $9.3 trillion of public debt (20%) to additional military and intelligence spending since September 2001, plus another $45 billion annually in interest.

The extent to which the deficit and debt increases are a cause or effect of wider systemic problems is frequently debated. For example, in January 2008, then GAO Director
Comptroller General of the United States
The Comptroller General of the United States is the director of the Government Accountability Office , a legislative branch agency established by Congress in 1921 to ensure the fiscal and managerial accountability of the federal government...

 David Walker
David M. Walker (U.S. Comptroller General)
David M. Walker served as United States Comptroller General from 1998 to 2008, and is now the Founder and CEO of the Comeback America Initiative.- Career as Comptroller General :...

 pointed to four types of "deficits" that cause the overall fiscal problem: budget, trade, savings and leadership. Bill Gross
Bill Gross
Bill Gross is an American businessman. Born in 1958, he grew up in Encino, California. He founded GNP Loudspeakers , an audio equipment manufacturer; GNP Development Inc., acquired by Lotus Software; and Knowledge Adventure, an educational software company, later acquired by Cendant...

 wrote in August 2011 that aging demographics, globalization, and technological innovation are key drivers of a long-term lack of sustainable global demand: "Debt has been simply an abused sovereign and private market antidote to sustain [demand]. We and our global market competitors are and have been experiencing a lack of aggregate demand for several decades. It is now only visibly coming to a head, as the magic elixir of leverage is drained and exhausted." Economist Carmen Reinhart
Carmen Reinhart
-External links:*...

 wrote that the world is recovering from a global financial crisis, which is different from a typical recession caused by the business cycle. Historically, after financial crises, unemployment is considerably higher and GDP growth significantly lower than pre-crisis levels, for 7–10 years.

Economist Joseph Stiglitz wrote in October 2011 that the recession and high unemployment of the 2009-2011 period was years in the making and driven by: unsustainable consumption; high manufacturing productivity outpacing demand thereby increasing unemployment; income inequality that shifted income from those who tended to spend it (i.e., the middle class) to those who do not (i.e., the wealthy); and emerging market's buildup of currency reserves (to the tune of $7.6 trillion by 2011) which was not spent. These factors all lead to a "massive" shortfall in aggregate demand, which was "papered over" by demand related to the housing bubble until it burst.

Economic debates


CBO estimated in October 2011 that approximately one-third of the deficit projected for fiscal year 2012 is due to economic factors, which have caused expenditures to increase and revenues to decline: "...if the economy was operating at its potential level...the projected federal deficit under current law in fiscal year 2012 would be about a third lower, or roughly $630 billion instead of the $973 billion projected in CBO’s most recent baseline. That deficit would be equal to about 4.0 percent of gross domestic product (GDP), compared with the 6.2 percent deficit projected for 2012 in CBO’s baseline."

Unemployment



CBO reported in 2009 that income tax revenues had declined by nearly 20% due to higher unemployment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...

 caused by the recession, while social safety net expenditures increased significantly. The Economic Policy Institute
Economic Policy Institute
The Economic Policy Institute is a 501 non-profit, liberal, nonpartisan think tank that seeks to broaden the public debate about strategies to achieve a prosperous and fair economy...

 (EPI) estimated in May 2010 that 15 million Americans were unemployed and another 11 million were involuntarily working part time or had dropped out of the labor force. The U.S. labor force participation rate has declined from over 66% in 2007 to 64.2% in April 2011, while the ratio of civilians employed relative to the population has declined from over 63% in 2007 to 58.4%. Unemployment is highly correlated
Correlation
In statistics, dependence refers to any statistical relationship between two random variables or two sets of data. Correlation refers to any of a broad class of statistical relationships involving dependence....

 with education levels. In April 2011, the unemployment rate was 4.5% for those with a college degree, 9.7% for high school graduates, and 14.6% for those without a high school diploma. The U.S. economy added 9.2 million net jobs during the 2000-2007 period but only 2.2 million jobs from 2000–2010, with the banking crisis and recession eliminating an estimated 7 million jobs. By contrast, the U.S. economy added 18.1 million jobs from 1990–2000 and 19.5 million jobs from 1980-1990.
Unemployment and economic growth

Niall Ferguson
Niall Ferguson
Niall Campbell Douglas Ferguson is a British historian. His specialty is financial and economic history, particularly hyperinflation and the bond markets, as well as the history of colonialism.....

 estimated that excluding the effects of home equity withdrawal made possible by a U.S. housing bubble, the U.S. economy grew only 1% annually from 2001-2008. The U.S. economy has historically required 2-4% annual growth (Okun's Law
Okun's law
In economics, Okun's law is an empirically observed relationship relating unemployment to losses in a country's production first quantified by Arthur M. Okun. The "gap version" states that for every 1% increase in the unemployment rate, a country's GDP will be at an additional roughly 2% lower...

) to employ new workers entering the workforce, to prevent the unemployment rate from rising. This implies that unemployment would have been growing since 2001 in the absence of the housing bubble, instead of suddenly rising in its wake. Economist Joseph Stiglitz wrote in October 2011: "...the economy was very sick before the crisis
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....

; the housing bubble merely papered over its weaknesses. Without bubble-supported consumption, there would have been a massive shortfall in aggregate demand. Instead, the personal saving rate plunged to 1%, and the bottom 80% of Americans were spending, every year, roughly 110% of their income."

Former Treasury Secretary Lawrence Summers
Lawrence Summers
Lawrence Henry Summers is an American economist. He served as the 71st United States Secretary of the Treasury from 1999 to 2001 under President Bill Clinton. He was Director of the White House United States National Economic Council for President Barack Obama until November 2010.Summers is the...

 stated in July 2011: "Look, the most important determinant of where the deficit is going to be three, four years from now is how fast the economy grows. If the economy stagnates, no matter what we do with deficit deals, that deficit's going to be in a terrible place, and that's why growing the economy is so important." CBO estimated in January 2011 that reducing its GDP growth estimates by 0.1% annually for a decade would increase the cumulative deficits from 2012-2021 by about $300 billion; CBO estimated GDP growth between 2.7% and 3.8% during that period.

Fareed Zakaria
Fareed Zakaria
Fareed Rafiq Zakaria is an Indian-American journalist and author. From 2000 to 2010, he was a columnist for Newsweek and editor of Newsweek International. In 2010 he became Editor-At-Large of Time magazine...

 described the factors slowing growth in developed countries like the U.S., writing in November 2011: "The fact is that Western economies - with high wages, generous middle-class subsidies and complex regulations and taxes - have become sclerotic. Now they face pressures from three fronts: demography (an aging population), technology (which has allowed companies to do much more with fewer people) and globalization (which has allowed manufacturing and services to locate across the world)."
Unemployment - Is it cyclical or structural?

There is significant debate among economists regarding the extent to which unemployment is cyclical (i.e., temporary and responsive to stimulus measures that spur demand) or structural (i.e., longer-term and requiring process reforms and re-allocation of workers among industries and geographies). Wells Fargo Economics estimated in May 2011 that the structural unemployment rate
NAIRU
In monetarist economics, particularly the work of Milton Friedman, on which also worked Lucas Papademos and Franco Modigliani in 1975,NAIRU is an acronym for Non-Accelerating Inflation Rate of Unemployment, and refers to a level of unemployment below which inflation rises.It is widely used in...

 ranges between 6.3% to 7.1% and has risen due to the crisis. CBO estimates the rate around 5%. Factors affecting the structural rate of unemployment included: Education levels; rising costs of employee healthcare benefits; extension of unemployment benefits; reduced workforce mobility (i.e., ability to relocate to available jobs is reduced due to home price declines); and a skills mismatch (i.e., the skills of the unemployed do not match with open jobs). Mohamed El-Erian wrote in May 2011: "Unemployment must be seen as much more than a cyclical problem; it's a structural one that requires concurrent progress on job retraining, housing reform, education, social safety nets and private-sector competitiveness...America's political parties must jointly agree [to make] progress on the structural-reform agenda..."

The Congressional Research Service
Congressional Research Service
The Congressional Research Service , known as "Congress's think tank", is the public policy research arm of the United States Congress. As a legislative branch agency within the Library of Congress, CRS works exclusively and directly for Members of Congress, their Committees and staff on a...

 summarized a variety of studies that indicated changes in unemployment between 2007 and 2010 were 65-80% cyclical, thus mainly due to reduced aggregate demand for goods and services. Labor mobility was not a key issue due to the widespread nature of job losses across geographies and industries. Cyclically sensitive industries such as manufacturing and construction had the most significant job losses. One study referenced in the CRS research indicated that long-term unemployment can convert cyclical to structural unemployment through loss of skills.
Unemployment outlook

CBO forecasts that unemployment will be 8.9% during 2011 and 8.5% during 2012, falling to 5.3 by 2016. However, the McKinsey Global Institute reported in June 2011 that the U.S. economy was unlikely to return to a 5% unemployment rate prior to 2020. Further, the lag between GDP and employment returning to their pre-recession peaks has grown with recent recessions. This averaged around 6 months for 7 recessions between 1948-1981 but rose to 15 months in 1990 and 39 months in 2001. To return to pre-recession employment levels by 2020, the U.S. economy would have to create 21 million net new jobs. This is roughly 187,000 jobs per month, versus 117,000 created on average during each of the first three months of 2011.

High consumer debt levels inhibit demand for goods and services, which affects employment. USA household debt as a percentage of annual disposable personal income was 127% at the end of 2007, versus 77% in 1990. Economist Carmen Reinhart
Carmen Reinhart
-External links:*...

 stated in August 2011: "Debt de-leveraging [reduction] takes about seven years...And in the decade following severe financial crises, you tend to grow by 1 to 1.5 percentage points less than in the decade before, because the decade before was fueled by a boom in private borrowing, and not all of that growth was real. The unemployment figures in advanced economies after falls are also very dark. Unemployment remains anchored about five percentage points above what it was in the decade before.”

Trade deficit and globalization


Imported goods are made by workers in other countries, which affects U.S. employment and wage levels. The U.S. has a large current account
Current account
In economics, the current account is one of the two primary components of the balance of payments, the other being the capital account. The current account is the sum of the balance of trade , net factor income and net transfer payments .The current account balance is one of two major...

 or trade deficit, meaning its imports exceed exports. In 2005, Ben Bernanke
Ben Bernanke
Ben Shalom Bernanke is an American economist, and the current Chairman of the Federal Reserve, the central bank of the United States. During his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis....

 addressed the implications of the USA's high and rising current account deficit, which increased by $650 billion between 1996 and 2004, from 1.5% to 5.8% of GDP. The trade deficit reached a dollar peak of approximately $700 billion in 2008 (4.9% of GDP) before dropping to $420 billion in 2009 (2.9% of GDP) due to the 2009 recession. The trade deficit was $500 billion in 2010, with a goods deficit of $650 billion offset by a services surplus of $150 billion.

China's share of global manufacturing increased from approximately 5% in 1996 to 12% in 2008. China represents roughly one-third of the U.S. trade deficit, nearly $250 billion in 2008. The Economic Policy Institute
Economic Policy Institute
The Economic Policy Institute is a 501 non-profit, liberal, nonpartisan think tank that seeks to broaden the public debate about strategies to achieve a prosperous and fair economy...

 estimated U.S. job losses due to the trade deficit with China alone at 2.3 million jobs between 2001 and 2007, along with significantly lowered U.S. wages. USA Today
USA Today
USA Today is a national American daily newspaper published by the Gannett Company. It was founded by Al Neuharth. The newspaper vies with The Wall Street Journal for the position of having the widest circulation of any newspaper in the United States, something it previously held since 2003...

 reported in 2007 that an estimated one in six factory jobs (3.2 million) have disappeared from the U.S. since 2000, due to automation or off-shoring to countries like Mexico and China, where labor is cheaper. The Economist
The Economist
The Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in offices in the City of Westminster, London, England. Continuous publication began under founder James Wilson in September 1843...

reported in March 2011 that U.S. manufacturing employment declined steadily from approximately 17 million in 2000 to under 12 million in 2010.

These lost manufacturing jobs are fueling a debate over globalization
Globalization
Globalization refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import...

 -- the increasing connection of the United States and other economies. Due in part to the end of the Cold War
Cold War
The Cold War was the continuing state from roughly 1946 to 1991 of political conflict, military tension, proxy wars, and economic competition between the Communist World—primarily the Soviet Union and its satellite states and allies—and the powers of the Western world, primarily the United States...

 and in part to new communications technologies that fostered an integrated global supply chain, nearly three billion working-age persons from China, India, the former Socialist economies in Eastern Europe, and other emerging markets have steadily been joining the global free market labor force since 1990. According to an October 2011 report by the New America Foundation
New America Foundation
The New America Foundation is a non-profit public policy institute and think tank with offices in Washington, D.C. and Sacramento, CA. It was founded in 1999 by Ted Halstead, Sherle Schwenninger, Michael Lind and Walter Russell Mead....

, "The integration of these high-savings, lower wage economies into the global economy...decisively shifted the balance of global supply and demand. In consequence, the world economy now is beset by excess supplies of labor, capital, and productive capacity relative to global demand."

This global workforce competes for both manufacturing and service jobs. An estimated 84% of Americans in the labor force are employed in service jobs, up from 81% in 2000. Princeton economist Alan Blinder
Alan Blinder
Alan Stuart Blinder is an American economist. He serves at Princeton University as the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs in the Economics Department, Vice Chairman of The Observatory Group, and as co-director of Princeton’s Center for Economic Policy Studies,...

 said in 2007 that the number of jobs at risk of being shipped out of the country could reach 40 million over the next 10 to 20 years, which represents one out of every three service sector jobs. For example, entry level call center workers in the U.S. earn about $20,000 per year, about six times as much as similar jobs in India. An estimated 750,000 call center jobs were off-shored by U.S. firms to India and the Philippines as of November 2011. Since the early 1980s, the globalization of production and the growth of markets abroad have driven many firms to locate production closer to their customers. Moreover, the push for competitiveness and productivity has meant more automation (i.e., capital instead of labor) to improve the efficiency of production.

A popular product, the Apple iPod
IPod
iPod is a line of portable media players created and marketed by Apple Inc. The product line-up currently consists of the hard drive-based iPod Classic, the touchscreen iPod Touch, the compact iPod Nano, and the ultra-compact iPod Shuffle...

, offers an interesting perspective on globalization and employment. This product was developed by a U.S. corporation. In 2006, it was produced by about 14,000 workers in the U.S. and 27,000 overseas. Further, the salaries attributed to this product were overwhelmingly distributed to highly skilled U.S. professionals, as opposed to lower skilled U.S. retail employees or overseas manufacturing labor. Increasingly, globalization is shifting incomes to those with the highest educational backgrounds and professional skills. One interpretation of this result is that U.S. innovation can create more jobs overseas than domestically. Andrew Grove
Andrew Grove
Andrew Stephen Grove , is a Hungarian-born Jewish-American Businessman/ Engineer, Author & a science pioneer in the semiconductor industry. He escaped from Communist-controlled Hungary at the age of 20 and moved to the U.S., where he finished his education...

 wrote in July 2010 that key technology innovations are increasingly "scaled" or mass-produced in Asia, with a 10-1 ratio of overseas to domestic workers. He wrote that Asian countries "seem to understand that job creation must be the No. 1 objective of economic policy." He recommended a tax on products made off-shore, to be used to fund companies that will scale their U.S. operations.

Economist Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...

 wrote in 2007: "For the world economy as a whole — and especially for poorer nations — growing trade between high-wage and low-wage countries is a very good thing...But for American workers the story is much less positive. In fact, it’s hard to avoid the conclusion that growing U.S. trade with third world countries reduces the real wages of many and perhaps most workers in this country...The trouble now is that these effects may no longer be as modest as they were, because imports of manufactured goods from the third world have grown dramatically — from just 2.5 percent of GDP in 1990 to 6 percent in 2006." Bill Gross
Bill Gross
Bill Gross is an American businessman. Born in 1958, he grew up in Encino, California. He founded GNP Loudspeakers , an audio equipment manufacturer; GNP Development Inc., acquired by Lotus Software; and Knowledge Adventure, an educational software company, later acquired by Cendant...

 wrote in September 2011: "Globalization has hollowed developed economy labor markets...Globalization and technological innovation have been extremely negative influences on domestic wages and employment."

Former Fed chair Paul Volcker
Paul Volcker
Paul Adolph Volcker, Jr. is an American economist. He was the Chairman of the Federal Reserve under United States Presidents Jimmy Carter and Ronald Reagan from August 1979 to August 1987. He is widely credited with ending the high levels of inflation seen in the United States in the 1970s and...

 argued in February 2010 that the U.S. should make more of the goods it consumes domestically: "We need to do more manufacturing again. We're never going to be the major world manufacturer as we were some years ago, but we could do more than we're doing and be more competitive. And we've got to close that big gap. You know, consumption is running about 5 percent above normal. That 5 percent is reflected just about equally to what we're importing in excess of what we're exporting. And we've got to bring that back into closer balance."

Policies that affect the value of the U.S. dollar relative to other currencies also affect employment levels. Economist Christina Romer
Christina Romer
Christina D. Romer is the Class of 1957 Garff B. Wilson Professor of Economics at the University of California, Berkeley and a former Chair of the Council of Economic Advisers in the Obama administration...

 wrote in May 2011: "A weaker dollar means that our goods are cheaper relative to foreign goods. That stimulates our exports and reduces our imports. Higher net exports raise domestic production and employment. Foreign goods are more expensive, but more Americans are working. Given the desperate need for jobs, on net we are almost surely better off with a weaker dollar for a while." Economist Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...

 wrote in May 2011: "First, what’s driving the turnaround in our manufacturing trade? The main answer is that the U.S. dollar has fallen against other currencies, helping give U.S.-based manufacturing a cost advantage. A weaker dollar, it turns out, was just what U.S. industry needed."

Can the U.S. outgrow the problem?


There is debate regarding whether tax cuts, less intrusive regulation, and productivity improvements could feasibly generate sufficient economic growth to offset the deficit and debt challenges facing the country. According to David Stockman
David Stockman
David Alan Stockman is a former U.S. politician and businessman, serving as a Republican U.S. Representative from the state of Michigan and as the Director of the Office of Management and Budget ....

, OMB Director under President Reagan, post-1980 Republican ideology embraces the idea that the "economy will outgrow the deficit if plied with enough tax cuts." Former President George W. Bush exemplified this ideology when he wrote in 2007: "...it is also a fact that our tax cuts have fueled robust economic growth and record revenues." However, as described above, multiple studies by economists across the political spectrum and several government organizations argue that tax cuts increase deficits and debt.

The GAO estimated in 2008 that double-digit GDP growth would be required for the next 75 years to outgrow the projected increases in deficits and debt; GDP growth averaged 3.2% during the 1990s. Because mandatory spending growth rates will far exceed any reasonable growth rate in GDP and the tax base, the GAO concluded that the U.S. cannot grow its way out of the problem.

Fed Chair Ben Bernanke
Ben Bernanke
Ben Shalom Bernanke is an American economist, and the current Chairman of the Federal Reserve, the central bank of the United States. During his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis....

 stated in April 2010: "Unfortunately, we cannot grow our way out of this problem. No credible forecast suggests that future rates of growth of the U.S. economy will be sufficient to close these deficits without significant changes to our fiscal policies."

Budgetary impact of the 2001 and 2003 tax cuts


A variety of tax cuts were enacted under President Bush between 2001–2003 (commonly referred to as the "Bush tax cuts
Bush tax cuts
The Bush tax cuts refers to changes to the United States tax code passed during the presidency of George W. Bush and extended during the presidency of Barack Obama that generally lowered tax rates and revised the code specifying taxation in the United States...

"), through the Economic Growth and Tax Relief Reconciliation Act of 2001
Economic Growth and Tax Relief Reconciliation Act of 2001
The Economic Growth and Tax Relief Reconciliation Act of 2001 , was a sweeping piece of tax legislation in the United States by President George W. Bush...

 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). Most of these tax cuts were scheduled to expire December 31, 2010. Since CBO projections are based on current law, the projections discussed above assume these tax cuts will expire, which may prove politically challenging.

In August 2010, CBO estimated that extending the tax cuts for the 2011-2020 time period would add $3.3 trillion to the national debt: $2.65 trillion in foregone tax revenue plus another $0.66 trillion for interest and debt service costs.

The non-partisan Pew Charitable Trusts estimated in May 2010 that extending some or all of the Bush tax cuts would have the following impact under these scenarios:
  • Making the tax cuts permanent for all taxpayers, regardless of income, would increase the national debt $3.1 trillion over the next 10 years.
  • Limiting the extension to individuals making less than $200,000 and married couples earning less than $250,000 would increase the debt about $2.3 trillion in the next decade.
  • Extending the tax cuts for all taxpayers for only two years would cost $558 billion over the next 10 years.


The non-partisan Congressional Research Service
Congressional Research Service
The Congressional Research Service , known as "Congress's think tank", is the public policy research arm of the United States Congress. As a legislative branch agency within the Library of Congress, CRS works exclusively and directly for Members of Congress, their Committees and staff on a...

 (CRS) has reported the 10-year revenue loss from extending the 2001 and 2003 tax cuts beyond 2010 at $2.9 trillion, with an additional $606 billion in debt service costs (interest), for a combined total of $3.5 trillion. CRS cited CBO estimates that extending the cuts permanently, including the repeal of the estate tax, would add 2% of GDP to the annual deficit.

The Center on Budget and Policy Priorities
Center on Budget and Policy Priorities
The Center on Budget and Policy Priorities is a non-profit think tank that describes itself as a "policy organization ... working at the federal and state levels on fiscal policy and public programs that affect low- and moderate-income families and individuals."The Center examines the short- and...

 wrote in 2010: "The 75-year Social Security shortfall is about the same size as the cost, over that period, of extending the 2001 and 2003 tax cuts for the richest 2 percent of Americans (those with incomes above $250,000 a year). Members of Congress cannot simultaneously claim that the tax cuts for people at the top are affordable while the Social Security shortfall constitutes a dire fiscal threat."

Can reducing income tax rates increase government revenue?



In theory, the government collects no revenue at either zero or 100% tax rates. So there is some intermediate point at which government revenue is maximized. Lowering tax rates from 100% to this hypothetical rate that maximizes revenue would theoretically raise revenue, while continuing to lower tax rates below this rate would lower revenues. This concept underlies the Laffer Curve
Laffer curve
In economics, the Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation. It is used to illustrate the concept of taxable income elasticity . The curve is constructed by thought experiment...

, an element of supply-side economics
Supply-side economics
Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing...

.

Since the 1970s, some "supply side" economists have contended that lowering marginal tax rates could stimulate economic growth to such a degree that tax revenues could rise, other factors being held constant. However, economic models and econometric analysis have found weak support for the "supply side" theory
Supply-side economics
Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing...

. The Center on Budget and Policy Priorities
Center on Budget and Policy Priorities
The Center on Budget and Policy Priorities is a non-profit think tank that describes itself as a "policy organization ... working at the federal and state levels on fiscal policy and public programs that affect low- and moderate-income families and individuals."The Center examines the short- and...

 (CBPP) summarized a variety of studies done by economists across the political spectrum that indicated tax cuts do not pay for themselves and increase deficits. Studies by the CBO and the U.S. Treasury also indicated that tax cuts do not pay for themselves. In 2003, 450 economists, including ten Nobel Prize laureate, signed the Economists' statement opposing the Bush tax cuts
Economists' statement opposing the Bush tax cuts
The Economists' statement opposing the Bush tax cuts was a statement signed by roughly 450 economists, including ten of the twenty-four American Nobel Prize laureates alive at the time, in February 2003 who urged the U.S. President George W. Bush not to enact the 2003 tax cuts; seeking and sought...

, sent to President Bush stating that "these tax cuts will worsen the long-term budget outlook... will reduce the capacity of the government to finance Social Security and Medicare benefits as well as investments in schools, health, infrastructure, and basic research... [and] generate further inequalities in after-tax income."

Economist Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...

 wrote in 2007: "Supply side doctrine, which claimed without evidence that tax cuts would pay for themselves, never got any traction in the world of professional economic research, even among conservatives." Economist Nouriel Roubini
Nouriel Roubini
Nouriel Roubini is an American economist. He claims to have predicted both the collapse of the United States housing market and the worldwide recession which started in 2008. He teaches at New York University's Stern School of Business and is the chairman of Roubini Global Economics, an economic...

 wrote in October 2010 that the Republican Party was "trapped in a belief in voodoo economics, the economic equivalent of creationism" while the Democratic administration was unwilling to improve the tax system via a carbon tax or value-added tax. Warren Buffett
Warren Buffett
Warren Edward Buffett is an American business magnate, investor, and philanthropist. He is widely regarded as one of the most successful investors in the world. Often introduced as "legendary investor, Warren Buffett", he is the primary shareholder, chairman and CEO of Berkshire Hathaway. He is...

 wrote in 2003: "When you listen to tax-cut rhetoric, remember that giving one class of taxpayer a 'break' requires -- now or down the line -- that an equivalent burden be imposed on other parties. In other words, if I get a break, someone else pays. Government can't deliver a free lunch to the country as a whole." Former Comptroller General of the United States
Comptroller General of the United States
The Comptroller General of the United States is the director of the Government Accountability Office , a legislative branch agency established by Congress in 1921 to ensure the fiscal and managerial accountability of the federal government...

 David Walker
David M. Walker (U.S. Comptroller General)
David M. Walker served as United States Comptroller General from 1998 to 2008, and is now the Founder and CEO of the Comeback America Initiative.- Career as Comptroller General :...

 stated during January 2009: "You can't have guns, butter and tax cuts. The numbers just don't add up."

Income tax revenues generally rose to new peaks in nominal dollar terms each year from 1970 to 2000 as the economy grew, with the exception of 1983, following the recession of 1981-1982. However, after peaking in 2000, income tax revenues did not regain this peak again until 2006. After a plateau in 2007 and 2008, revenues fell markedly in 2009 and 2010 due to a financial crisis and recession. Income tax revenues in 2010 remained below their 2000 peak. Relative to GDP, income tax revenues declined during most of the 1980s (from 9.0% GDP in 1980 to 8.3% GDP in 1989), rose during most of the 1990s (from 8.1% GDP in 1990 to 9.6% GDP in 1999) then declined in the 2000s (from 10.2% GDP in 2000 to 6.5% GDP in 2009). The extent to which economic activity and tax policy interact to drive these trends is debated by experts. While marginal income tax rates were lowered in the early 1980s, dollar revenue increased throughout the period, although revenue relative to GDP declined. Marginal tax rates were raised during the 1990s, and both revenue dollars and revenue relative to GDP increased. Marginal rates were lowered again in the early 2000s, and both revenue and revenue relative to GDP generally declined.

Can increasing tax receipts alone address the budget deficit?


Expert panels across the political spectrum have argued for a combination of revenue increases and expense reductions to reduce the budget deficit and future debt increases. However, the nature and balance of these measures varies considerably. Economist Bruce Bartlett
Bruce Bartlett
Bruce Bartlett is an American historian who turned to writing about supply-side economics. He was a domestic policy adviser to President Ronald Reagan and was a Treasury official under President George H.W. Bush....

 wrote in 2009 that without benefit cuts in Medicare and Social Security, federal taxes would have to increase by 8.1% of GDP now and forever to cover estimated program shortfalls, while avoiding debt increases. The 30-year historical average federal tax receipts are 18.4% of GDP, so this would represent a substantial increase in tax receipts as a share of GDP relative to historical levels in the United States. However, such an increase would still leave tax revenues relative to GDP substantially lower than other developed nations like France and Germany (see: List of countries by tax revenue as percentage of GDP).

CBO estimated in August 2011 that if the Bush tax cuts
Bush tax cuts
The Bush tax cuts refers to changes to the United States tax code passed during the presidency of George W. Bush and extended during the presidency of Barack Obama that generally lowered tax rates and revised the code specifying taxation in the United States...

 and other tax cuts enacted or extended during 2009 and 2010 were allowed to expire, the budget deficit would be reduced by 2.0-3.0% GDP each year from 2013-2021.

Do tax hikes "kill jobs"?


There is an ongoing debate regarding the effect of taxation on employment or job creation. Prominent Republican Congressmen have argued that raising taxes would "kill" jobs. Different views are expressed depending on the type of taxation under discussion.
Income taxes

The historical record indicates that marginal income tax rate changes have little impact on job creation or employment.
  • During the 1970s, marginal income tax rates were far higher than subsequent periods and the U.S. created 20.6 million net new jobs.
  • During the 1980s, marginal income tax rates were lowered and the U.S. created 19.5 million net new jobs.
  • During the 1990s, marginal income tax rates rose and the U.S. created 18.1 million net new jobs.
  • From 2000-2010, marginal income tax rates were lowered and the U.S. created only 2.2 million net new jobs, with 9.2 million created 2000-2007.


The Center on Budget and Policy Priorities
Center on Budget and Policy Priorities
The Center on Budget and Policy Priorities is a non-profit think tank that describes itself as a "policy organization ... working at the federal and state levels on fiscal policy and public programs that affect low- and moderate-income families and individuals."The Center examines the short- and...

 (CBPP) wrote in March 2009: "Small business employment rose by an average of 2.3 percent (756,000 jobs) per year during the Clinton years, when tax rates for high-income filers were set at very similar levels to those that would be reinstated under President Obama’s budget. But during the Bush years, when the rates were lower, employment rose by just 1.0 percent (367,000 jobs)." CBPP reported in September 2011 that both employment and GDP grew faster in the seven-year period following President Clinton's income tax rate increase of 1993, than a similar period after the Bush tax cuts of 2001.

In addition, Warren Buffett
Warren Buffett
Warren Edward Buffett is an American business magnate, investor, and philanthropist. He is widely regarded as one of the most successful investors in the world. Often introduced as "legendary investor, Warren Buffett", he is the primary shareholder, chairman and CEO of Berkshire Hathaway. He is...

 has argued that taxes have little to do with job creation, writing in August 2011: "And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation."

A more specific, frequently debated, proposal supported by prominent Democrats is to significantly increase the taxes of the top 1 percent of income earners to generate additional revenue. According to the Tax Foundation
Tax Foundation
The Tax Foundation is a Washington, D.C.-based think tank founded in 1937 that collects data and publishes research studies on tax policies at the federal and state levels. The organization is broken into three primary areas of research which are the Center for Federal Fiscal Policy, The and the...

, the so-called "super-rich" accumulated more than 20 percent of the nation's total adjusted gross income
Adjusted Gross Income
For United States individual income tax, taxable income is adjusted gross income less allowances for personal exemptions and itemized deductions. Adjusted gross income is total gross income minus specific items laid out in the tax code...

 in 2008 and paid 36 percent of the total income tax. Republican opponents fear that any type of large tax hike, even to the wealthy, would decrease both job creation and investment, slowing the economy even further. In an op-ed in The New York Times
The New York Times
The New York Times is an American daily newspaper founded and continuously published in New York City since 1851. The New York Times has won 106 Pulitzer Prizes, the most of any news organization...

in August 2011, Buffett wrote in support of such a proposal, stating that the federal government should "stop coddling the super-rich" to help decrease the deficit. In response, conservative commentator Pat Buchanan
Pat Buchanan
Patrick Joseph "Pat" Buchanan is an American paleoconservative political commentator, author, syndicated columnist, politician and broadcaster. Buchanan was a senior adviser to American Presidents Richard Nixon, Gerald Ford, and Ronald Reagan, and was an original host on CNN's Crossfire. He sought...

 challenged Buffett, and any other rich people who wanted higher taxes, to voluntarily donate the money to the IRS instead.
Corporate taxes

A number of US corporations claim that even the current 35 percent corporate income tax rate causes them to shift several of their operations, including their research and manufacturing facilities, overseas.

For example, Steven Ballmer, Microsoft
Microsoft
Microsoft Corporation is an American public multinational corporation headquartered in Redmond, Washington, USA that develops, manufactures, licenses, and supports a wide range of products and services predominantly related to computing through its various product divisions...

's chief executive officer, stated in 2009 that higher taxes "...makes U.S. jobs more expensive. [Microsoft is] better off taking lots of people and moving them out of the U.S. as opposed to keeping them inside the U.S." Microsoft reported an overall effective tax rate of 26 percent in its 2008 annual report: “Our effective tax rates are less than the statutory tax rate due to foreign earnings taxed at lower rates” the report said. U.S. tax rules let companies defer paying corporate rates as high as 35 percent on most types of foreign profits as long as that money remains invested overseas. President Obama says he wants to end such incentives to keep foreign profits tax-deferred so that companies would invest them in the U.S.

In comparing corporate taxes, the Congressional Budget Office
Congressional Budget Office
The Congressional Budget Office is a federal agency within the legislative branch of the United States government that provides economic data to Congress....

 found in 2005 that the top statutory tax rate was the third highest among OECD countries behind Japan and Germany. However, the U.S. ranked 27th lowest of 30 OECD countries in its collection of corporate taxes relative to GDP, at 1.8% vs. the average 2.5%.

Are budget deficits driven by a "spending problem" or a "revenue problem"?



Prominent Republican Congressmen have suggested that the federal deficits should be remedied solely with spending cuts, arguing that the U.S. has a "spending problem" not a "revenue problem." President Obama has proposed that the Bush tax cuts
Bush tax cuts
The Bush tax cuts refers to changes to the United States tax code passed during the presidency of George W. Bush and extended during the presidency of Barack Obama that generally lowered tax rates and revised the code specifying taxation in the United States...

 should be allowed to expire for the wealthiest taxpayers, while Alan Greenspan
Alan Greenspan
Alan Greenspan is an American economist who served as Chairman of the Federal Reserve of the United States from 1987 to 2006. He currently works as a private advisor and provides consulting for firms through his company, Greenspan Associates LLC...

 has proposed that these tax cuts should expire at all income levels. It is helpful in analyzing this problem to evaluate near-term and long-term fiscal conditions.
Near-term

Taking the last balanced "total" budget in 2001 as a standard, spending has risen by 5.6% GDP, from 18.2% GDP in 2001 to 23.8% GDP in 2010, while revenues declined by 4.6% GDP, from 19.5% GDP to 14.9% GDP over the same interval. By this measure, spending has increased about 1% GDP more than revenues have declined. Using the historical (1971–2008) average spending of 20.6% GDP and revenues of 18.2%, the spending increase of 3.2% GDP is smaller than the revenue decline of 3.3% GDP. In other words, the "spending problem" and "revenue problem" are comparable in size. Recessions typically cause spending to rise on social safety net programs such as unemployment insurance and food stamps, while tax revenues decline due to unemployment and reduced economic activity.
Long-term

In the long-run, Medicare and Medicaid are projected to increase dramatically relative to GDP, while other categories of spending are expected to remain relatively constant. The Congressional Budget Office
Congressional Budget Office
The Congressional Budget Office is a federal agency within the legislative branch of the United States government that provides economic data to Congress....

 expects Medicare and Medicaid to rise from 5.3% GDP in 2009 to 10.0% in 2035 and 19.0% by 2082. CBO has indicated healthcare spending per beneficiary is the primary long-term fiscal challenge. So in the long-run, spending on these programs is the key issue, far outweighing any revenue consideration. Economist Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...

 has made the argument that any serious attempt to tackle long-run deficit problems can be summed up in "seven words: health care, health care, health care, revenue."

Earmarks


GAO defines "earmarking" as "designating any portion of a lump-sum amount for particular purposes by means of legislative language." Earmarking can also mean "dedicating collections by law for a specific purpose." In some cases, legislative language may direct federal agencies to spend funds for specific projects. In other cases, earmarks refer to directions in appropriation committee reports, which are not law. Various organizations have estimated the total number and amount of earmarks. An estimated 16,000 earmarks containing nearly $48 billion in spending were inserted into larger, often unrelated bills during 2005. While the number of earmarks has grown in the past decade, the total amount of earmarked funds is approximately 1-2 percent of federal spending.

Fraud, waste and abuse


The Office of Management and Budget estimated that the federal government made $98 billion in "improper payments" during FY2009, an increase of 38% vs. the $72 billion the prior year. This increase was due in part to effects of the financial crisis and improved methods of detection. The total included $54 billion for healthcare-related programs, 9.4% of the $573 billion spent on those programs. The government pledged to do more to combat this problem, including better analysis, auditing, and incentives. During July 2010, President Obama signed into law the Improper Payments Elimination and Recovery Act of 2010
Improper Payments Elimination and Recovery Act of 2010
The United States Improper Payments Elimination and Recovery Act of 2010 was signed by President Barack Obama into law on July 22, 2010. The law requires federal agencies to spend at least $1 million annually on audits which target government fraud and waste....

, citing approximately $110 billion in unauthorized payments of all types.

Former GAO Director
Comptroller General of the United States
The Comptroller General of the United States is the director of the Government Accountability Office , a legislative branch agency established by Congress in 1921 to ensure the fiscal and managerial accountability of the federal government...

 David Walker
David M. Walker (U.S. Comptroller General)
David M. Walker served as United States Comptroller General from 1998 to 2008, and is now the Founder and CEO of the Comeback America Initiative.- Career as Comptroller General :...

 said in 2008: "Some people think that we can solve our financial problems by stopping fraud, waste and abuse or by canceling the Bush tax cuts or by ending the war in Iraq. The truth is, we could do all three of these things and we would not come close to solving our nation's fiscal challenges."

Stimulus packages


Fiscal stimulus can be characterized as investment, spending or tax cuts. For example, if the funds are used to create a physical asset that generates future cash flows (e.g., a power plant or toll road), the stimulus could be characterized as investment. Extending unemployment benefits are examples of government spending. Tax cuts may or may not be spent. There is significant debate among economists regarding which type of stimulus has the highest "multiplier" (i.e., increase in economic activity per dollar of stimulus). Fiscal stimulus is enacted by laws passed by Congress, which is distinct from monetary policy
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...

 conducted by central banks such as the U.S. Federal Reserve, which involves interest rates and the money supply.

Recent specific stimulus laws included the Economic Stimulus Act of 2008
Economic Stimulus Act of 2008
The Economic Stimulus Act of 2008 was an Act of Congress providing for several kinds of economic stimuli intended to boost the United States economy in 2008 and to avert a recession, or ameliorate economic conditions. The stimulus package was passed by the U.S. House of Representatives on January...

 and the American Recovery and Reinvestment Act of 2009
American Recovery and Reinvestment Act of 2009
The American Recovery and Reinvestment Act of 2009, abbreviated ARRA and commonly referred to as the Stimulus or The Recovery Act, is an economic stimulus package enacted by the 111th United States Congress in February 2009 and signed into law on February 17, 2009, by President Barack Obama.To...

 (ARRA). The former was primarily tax cuts, while the latter included a blend of tax cuts, investment and spending. The CBO initially estimated that ARRA would increase the federal budget deficit by $185 billion during 2009, by $399 billion in 2010, by $134 billion in 2011, for a total of $787 billion over the 2009-2019 period. The total was later revised to $825 billion.

There is significant debate on whether fiscal stimulus is actually effective in creating jobs and boosting the economy, with critics claiming that all it does is increase the deficit unnecessarily. CBO estimated in August 2011 that ARRA had significant positive effects on GDP and employment. For example, during 2010 the incremental effect on GDP ranged between 1.1 and 4.6 percentage points, the unemployment rate was lowered between 0.7 and 2.0 percentage points, additional employed persons ranged from 1.3 million to 3.6 million, and the number of full time equivalent jobs added ranged from 1.8 million to 5.2 million. Even after the Act spending stops in 2011, CBO estimated it will increase the number of people employed in 2012 by between 0.4 million and 1.1 million.

Beyond discrete stimulus packages, federal spending tends to increase during recessions due to "automatic stabilizers" such as unemployment compensation and nutrition programs. For example, during May 2010 CBO estimated that "automatic stabilizers added the equivalent of 1.9% of potential GDP to the [2009] deficit, an amount substantially greater than the 0.3% added in 2008. According to CBO’s baseline projections, the contribution of automatic stabilizers to the budget deficit will be roughly 2.3% of potential GDP in 2010 and 2.5% of potential GDP in 2011."

2010 Budget Proposal



President Barack Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...

 proposed his 2010 budget during February, 2009. He has indicated that health care, clean energy, education, and infrastructure will be priorities. The proposed increases in the national debt exceed $900 billion each year from 2010–2019, following the Bush administration's outgoing budget which allowed for a $2.5 trillion increase in the national debt for FY 2009.

Tax cuts will expire for the wealthiest taxpayers to increase revenues, returning marginal rates to the Clinton levels. Further, the base Department of Defense budget increases slightly through 2014 (Table S-7), from $534 to $575 billion, although supplemental appropriations for the Iraq War are expected to be reduced. In addition, estimates of revenue are based on GDP growth assumptions that exceed the Blue Chip Economists' consensus forecast considerably through 2012 (Table S-8).

2010 healthcare reform



The CBO estimated in December 2009 that the Senate healthcare reform bill, later signed into law on 23 March 2010, would reduce the deficit during the 2010-2019 period by a total of $132 billion. This figure comprises $615 billion in incremental costs, offset by cost reductions of $483 billion and additional taxes of $264 billion. The CBO also estimated that the deficit would be about 0.5% lower each year in the 2020-2029 decade, or about $70 billion annually in 2010 dollars. Whether the deficit reduction will materialize is questioned by many budget experts.

State finances


The U.S. federal government may be required to assist state governments further, as many U.S. states are facing budget shortfalls due to the 2008-2010 recession. The sharp decline in home prices has affected property tax revenue, while the decline in economic activity and consumer spending has led to a falloff in revenues from state sales taxes and income taxes. The Center on Budget and Policy Priorities
Center on Budget and Policy Priorities
The Center on Budget and Policy Priorities is a non-profit think tank that describes itself as a "policy organization ... working at the federal and state levels on fiscal policy and public programs that affect low- and moderate-income families and individuals."The Center examines the short- and...

 estimated that the 2010 and 2011 state shortfalls will total $375 billion. As of July 2010, over 30 states had raised taxes, while 45 had reduced services. State and local governments cut 405,000 jobs between January 2009 and February 2011.

GAO estimates that (absent policy changes) state and local governments will face budget gaps that rise from 1% of GDP in 2010 to around 2% by 2020, 2.5% by 2030, and 3.5% by 2040.

Further, many states have underfunded pensions, meaning the state has not contributed the amount estimated to be necessary to pay future obligations to retired workers. The Pew Center on the States reported in February 2010 that states have underfunded their pensions by nearly $1 trillion as of 2008, representing the gap between the $2.35 trillion states had set aside to pay for employees’ retirement benefits and the $3.35 trillion price tag of those promises.

Whether a U.S. state can declare bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....

, enabling it to re-negotiate its obligations to bondholders, pensioners, and public employee unions is a matter of legal and political debate. Journalist Matt Miller explained some of these issues in February 2011: "The AG [State Attorney General] might put a plan forward and agree to conditions. However, the AG has no say over the legislature. And only a legislature can raise taxes. In some cases, it would require a state constitutional amendment to reduce pensions. Add to this a federal judge who would oversee the process...and a state has sovereign immunity, which means the governor or legislature may simply refuse to go along with anything the judge rules or reject the reorganization plan itself."

Entitlement trust funds



Both Social Security and Medicare are funded by payroll tax revenues dedicated to those programs. Program tax revenues historically have exceeded payouts, resulting in program surpluses and the building of trust fund balances. The trust funds earn interest. Both Social Security and Medicare each have two component trust funds. As of FY2008, Social Security had a combined $2.4 trillion trust fund balance and Medicare's was $380 billion. If during an individual year program payouts exceed the sum of tax income and interest earned during that year (i.e., an annual program deficit), the trust fund for the program is drawn down to the extent of the shortfall. Legally, the mandatory nature of these programs compels the government to fund them to the extent of tax income plus any remaining trust fund balances, borrowing as needed. Once the trust funds are eliminated through expected future deficits, technically these programs can only draw on payroll taxes during the current year. In effect, they are "pay as you go" programs, with additional legal claims to the extent of their remaining trust fund balances.

Credit rating downgrade


In April 2011, rating agency Standard & Poor's
Standard & Poor's
Standard & Poor's is a United States-based financial services company. It is a division of The McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian...

 (S&P) issued a "negative" outlook on the U.S. "AAA" (highest quality) debt rating for the first time since the rating agency began in 1860, indicating there is a one in three chance of an outright reduction in the rating over the next two years. According to S&P, meaningful progress towards balancing the budget would be required to move the U.S. back to a "stable" outlook. Losing the AAA rating would likely mean higher interest rates and the sale of treasury bonds by entities required to hold AAA securities.

On August 5, 2011, representatives from S&P announced the company's decision to give a first-ever downgrade to U.S. sovereign debt, lowering the rating one notch to "AA+", with a negative outlook. S&P wrote: "The downgrade reflects our opinion that the fiscal consolidation plan
Budget Control Act of 2011
The Budget Control Act of 2011 was passed by the 112th United States Congress signed into law by President Barack Obama. It brought conclusion to the 2011 United States debt ceiling crisis, which had threatened to lead the United States into sovereign default on or about August 3, 2011.The law...

 that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics...the effectiveness,
stability, and predictability of American policy-making and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011."

Solving the problem



Describing the budgetary challenge


Then OMB Director Peter Orszag
Peter Ország
Peter Ország is a Slovak ice hockey referee, who referees in the Slovak Extraliga.-Career:He has officiated many international tournaments including the Winter Olympics. He has been named Slovak referee of the year....

 stated in a November 2009 interview: "It's very popular to complain about the deficit, but then many of the specific steps that you could take to address it are unpopular. And that is the fundamental challenge that we are facing, and that we need help both from the American public and Congress in addressing." He characterized the budget problem in two parts: a short- to medium-term problem related to the financial crisis of 2007–2010, which has reduced tax revenues significantly and involved large stimulus spending; and a long-term problem primarily driven by increasing healthcare costs per person. He argued that the U.S. cannot return to a sustainable long-term fiscal path by either tax increases or cuts to non-healthcare cost categories alone; the U.S. must confront the rising healthcare costs driving expenditures in the Medicare and Medicaid programs.

Fareed Zakaria
Fareed Zakaria
Fareed Rafiq Zakaria is an Indian-American journalist and author. From 2000 to 2010, he was a columnist for Newsweek and editor of Newsweek International. In 2010 he became Editor-At-Large of Time magazine...

 said in February 2010: "But, in one sense, Washington is delivering to the American people exactly what they seem to want. In poll after poll, we find that the public is generally opposed to any new taxes, but we also discover that the public will immediately punish anyone who proposes spending cuts in any middle class program which are the ones where the money is in the federal budget. Now, there is only one way to square this circle short of magic, and that is to borrow money, and that is what we have done for decades now at the local, state and federal level...So, the next time you accuse Washington of being irresponsible, save some of that blame for yourself and your friends."

Andrew Sullivan
Andrew Sullivan
Andrew Michael Sullivan is an English author, editor, political commentator and blogger. He describes himself as a political conservative. He has focused on American political life....

 said in March 2010: "...the biggest problem in this country is...they're big babies. I mean, people keep saying they don't want any tax increases, but they don't want to have their Medicare cut, they don't want to have their Medicaid [cut] or they don't want to have their Social Security touched an inch. Well, it's about time someone tells them, you can't have it, baby...You have to make a choice. And I fear that—and I always thought, you see, that that was the Conservative position. The Conservative is the Grinch who says no. And, in some ways, I think this in the long run, looking back in history, was Reagan's greatest bad legacy, which is he tried to tell people you can have it all. We can't have it all."

Harvard historian Niall Ferguson
Niall Ferguson
Niall Campbell Douglas Ferguson is a British historian. His specialty is financial and economic history, particularly hyperinflation and the bond markets, as well as the history of colonialism.....

 stated in a November 2009 interview: "The United States is on an unsustainable fiscal path. And we know that path ends in one of two ways; you either default on that debt, or you depreciate it away. You inflate it away with your currency effectively." He said the most likely case is that the U.S. would default on its entitlement obligations for Social Security and Medicare first, by reducing the obligations through entitlement reform. He also warned about the risk that foreign investors would demand a higher interest rate to purchase U.S. debt, damaging U.S. growth prospects.

Economist Herbert Stein
Herbert Stein
Herbert Stein was a senior fellow at the American Enterprise Institute and was on the board of contributors of The Wall Street Journal. He was chairman of the Council of Economic Advisers under President Nixon and President Ford. From 1974 until 1984, he was the A...

 is quoted as saying: "Trends that can't continue, won't." In May 2011, the Wells Fargo Economics Group wrote that: "The failure to control spending will result in some combination of higher inflation, higher interest rates, a weaker dollar, weaker economic growth and, hence, a lower standard of living in the United States..." Thomas Friedman
Thomas Friedman
Thomas Lauren Friedman is an American journalist, columnist and author. He writes a twice-weekly column for The New York Times. He has written extensively on foreign affairs including global trade, the Middle East, and environmental issues and has won the Pulitzer Prize three times.-Personal...

 wrote in September 2011: "But as long as every solution that is hard is off the table, then our slow national decline will remain on the table."

Polls


According to a CBS News/New York Times poll in July 2009, 56% of people were opposed to paying more taxes to reduce the deficit and 53% were also opposed to cutting spending. According to a Pew Research poll in June 2009, there was no single category of spending that a majority of Americans favored cutting. Only cuts in foreign aid (less than 1% of the budget), polled higher than 33%. Economist Bruce Bartlett wrote in December 2009: "Nevertheless, I can't really blame members of Congress for lacking the courage or responsibility to get the budget under some semblance of control. All the evidence suggests that they are just doing what voters want them to do, which is nothing."

A Bloomberg/Selzer national poll conducted in December 2009 indicated that more than two-thirds of Americans favored tax increases on the rich (individuals making over $500,000) to help solve the deficit problem. Further, an across-the-board 5% cut in all federal discretionary spending would be supported by 57%; this category is about 30% of federal spending. Only 26% favored tax increases on the middle class and only 23% favored reducing the growth rate in entitlements, such as Social Security.

A Rasmussen Reports survey in February 2010 showed that only 35% of voters correctly believe that the majority of federal spending goes to just defense, Social Security and Medicare. Forty-four percent (44%) say it’s not true, and 20% are not sure.

A January 2010 Rasmussen report showed that overall, 57% would like to see a cut in government spending, 23% favor a freeze, and 12% say the government should increase spending. Republicans and unaffiliated voters overwhelmingly favor spending cuts. Democrats are evenly divided between spending cuts and a spending freeze.

According to a Pew Research poll in March 2010, 31% of Republicans would be willing to decrease military spending to bring down the deficit. A majority of Democrats (55%) and 46% of Independents say they would accept cuts in military spending to reduce the deficit.

Solution strategies


Strategies for addressing the deficit problem may include policy choices regarding taxation and spending, along with policies designed to increase economic growth and reduce unemployment. These policy decisions may be evaluated in the context of a framework:
  • Promote economic growth and employment: A fast-growing economy offers the win-win
    Win-win game
    A win-win game is a game which is designed in a way that all participants can profit from it in one way or the other. In conflict resolution, a win-win strategy is a conflict resolution process that aims to accommodate all disputants.-Types:...

     outcome of a larger proverbial economic pie to divide, with higher employment and tax revenues, lower safety net spending and a lower debt-to-GDP ratio.
  • Make equitable trade-offs: Many budget choices have win-lose outcomes, reflecting how government revenues are divided, with some benefiting and others incurring costs. For example, taking away benefits from those in or near retirement may be considered inequitable, while phasing out retirement benefits for younger workers may be considered less so.
  • Keep short- and long-term issues in perspective: Healthcare cost inflation and an aging population are the primary long-term deficit drivers. Unemployment and various tax and spending policy choices are the primary short-term deficit drivers. Measures to encourage economic growth today can be implemented along with other measures to reduce future deficits.
  • Limit or avoid future spending increases: Policy choices may focus on preventing future increases via freezes or reducing annual rates of increase, as federal spending has not declined year-over-year in nominal dollars since at least 1970. Annual growth rates since 2001 in the top three expenditure categories (Healthcare, Social Security, and Defense) are far above the economic growth rate.
  • Invest productively: Some spending can be categorized as investments that lower future deficits. For example, if infrastructure, education or R&D investments could make U.S. workers and products more competitive or generate a revenue stream, these could reduce future deficits. Examples might include installing windows that reduce energy costs, toll roads and bridges, or power plants.
  • Avoid uncertainty and unnecessary regulation: Complex legislation may create uncertainty regarding future costs of doing business, which affects investment decisions made by businesses and households.
  • Implement budget process reforms: Budget rules could be implemented that require new legislation or programs to be funded by either cutting other spending or raising taxes (i.e., "Pay as you go" or PAYGO
    PAYGO
    PAYGO is the practice in the United States of financing expenditures with funds that are currently available rather than borrowed.-Budgeting:The PAYGO compels new spending or tax changes not to add to the federal deficit. Not to be confused with pay-as-you-go financing, which is when a government...

     rules.)

Taxation and spending strategies


Historically, government spending has not declined year-over-year in nominal terms since at least 1971. However, by limiting the rate of growth in discretionary spending (defense and non-defense) while growing revenues, the budget was balanced from 1998-2001. From 1990 to 1999, discretionary spending grew by a total of 14%, while revenues grew 77%. In contrast, from 2000-2009, discretionary spending grew by a total of 101% while revenues grew only 4% (see graphic at right).

In January 2008, then GAO Director
Comptroller General of the United States
The Comptroller General of the United States is the director of the Government Accountability Office , a legislative branch agency established by Congress in 1921 to ensure the fiscal and managerial accountability of the federal government...

 David Walker
David M. Walker (U.S. Comptroller General)
David M. Walker served as United States Comptroller General from 1998 to 2008, and is now the Founder and CEO of the Comeback America Initiative.- Career as Comptroller General :...

 presented a strategy for addressing what he called the federal budget "burning platform" and "unsustainable fiscal policy." This included improved financial reporting to better capture the obligations of the government; public education; improved budgetary and legislative processes, such as "pay as you go" rules; the restructure of entitlement programs and tax policy; and creation of a bi-partisan fiscal reform commission. He pointed to four types of "deficits" that make up the problem: budget, trade, savings and leadership.

Economist Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...

 has recommended a series of policy and economic actions to address the budget deficit. He wrote in February 2011: "What would a serious approach to our fiscal problems involve? I can summarize it in seven words: health care, health care, health care, revenue...Long-run projections suggest that spending on the major entitlement programs will rise sharply over the decades ahead, but the great bulk of that rise will come from the health insurance programs, not Social Security. So anyone who is really serious about the budget should be focusing mainly on health care...[by] getting behind specific actions
Health care reforms proposed during the Obama administration
This article is about specific types of system changes that have been proposed during the Obama administration to reform the U.S. health care system. It is not intended to cover specific legislative proposals, which often encompass multiple reform initiatives...

 to rein in costs."

Economist Nouriel Roubini
Nouriel Roubini
Nouriel Roubini is an American economist. He claims to have predicted both the collapse of the United States housing market and the worldwide recession which started in 2008. He teaches at New York University's Stern School of Business and is the chairman of Roubini Global Economics, an economic...

 wrote in May 2010: "There are only two solutions to the sovereign debt crisis — raise taxes or cut spending — but the political gridlock may prevent either from happening...In the US, the average tax burden as a share of GDP is much lower than in other advanced economies. The right adjustment for the US would be to phase in revenue increases gradually over time so that you don't kill the recovery while controlling the growth of government spending."

David Leonhardt
David Leonhardt
David Leonhardt is the Washington bureau chief of The New York Times. He joined The Times in 1999 and wrote the "Economics Scene" column, and for the Times Sunday Magazine. Before coming to The Times, he wrote for Business Week and The Washington Post...

 wrote in The New York Times
The New York Times
The New York Times is an American daily newspaper founded and continuously published in New York City since 1851. The New York Times has won 106 Pulitzer Prizes, the most of any news organization...

in March 2010: "For now, political leaders in both parties are still in denial about what the solution will entail. To be fair, so is much of the public. What needs to happen? Spending will need to be cut, and taxes will need to rise. They won’t need to rise just on households making more than $250,000, as Mr. Obama has suggested. They will probably need to rise on your household, however much you make...A solution that relied only on spending cuts would dismantle some bedrock parts of modern American society...A solution that relied only on taxes would muzzle economic growth."

Fed Chair Ben Bernanke
Ben Bernanke
Ben Shalom Bernanke is an American economist, and the current Chairman of the Federal Reserve, the central bank of the United States. During his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis....

 stated in April 2010: "Thus, the reality is that the Congress, the Administration, and the American people will have to choose among making modifications to entitlement programs such as Medicare and Social Security, restraining federal spending on everything else, accepting higher taxes, or some combination thereof."

Journalist Steven Pearlstein
Steven Pearlstein
Steven Pearlstein is an American columnist. He writes a column on business and the economy that is published twice weekly in The Washington Post...

 advocated in May 2010 a comprehensive series of budgetary reforms. These included: Spending caps on Medicare and Medicaid; gradually raising the eligibility age for Social Security and Medicare; limiting discretionary spending increases to the rate of inflation; and imposing a value-added tax. Journalist Robert J. Samuelson
Robert J. Samuelson
Robert Jacob Samuelson is a contributing editor of Newsweek and The Washington Post where he has written about business and economic issues since 1977. His columns appear in both publications. His articles also appear in the Los Angeles Times, The Boston Globe, and other influential newspapers...

 also recommended a ten-point deficit reduction plan.

Growth and employment strategies


Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...

 wrote in August 2011: "What would a real response to our problems involve? First of all, it would involve more, not less, government spending for the time being — with mass unemployment and incredibly low borrowing costs, we should be rebuilding our schools, our roads, our water systems and more. It would involve aggressive moves to reduce household debt via mortgage forgiveness and refinancing. And it would involve an all-out effort by the Federal Reserve to get the economy moving, with the deliberate goal of generating higher inflation to help alleviate debt problems."

Economist Robert Reich
Robert Reich
Robert Bernard Reich is an American political economist, professor, author, and political commentator. He served in the administrations of Presidents Gerald Ford and Jimmy Carter and was Secretary of Labor under President Bill Clinton from 1993 to 1997....

 wrote in September 2011 that political policies have resulted in relatively stagnant U.S. wages for the middle class since 1979 and record income inequality. Despite more women entering the workforce to provide two family incomes, U.S. consumption became increasingly debt-financed and unsustainable. He advocated higher taxation on the wealthy, stronger safety nets, strengthening labor unions (which represented less than 8% of the private labor force), Medicare for all, raising the average wages in trading partner countries, and a focus on education.

Economist Michael Spence
Michael Spence
Andrew Michael Spence is an American economist and recipient of the 2001 Nobel Memorial Prize in Economic Sciences, along with George A. Akerlof and Joseph E. Stiglitz, for their work on the dynamics of information flows and market development. He conducted this research while at Harvard University...

 explained in August 2011 that over the 1990-2008 period, job creation was almost entirely in the "non-tradable" sector (which produces goods and services that must be consumed domestically, like healthcare) with few jobs created in the "tradable" sector (which produces goods that can be sold internationally, like manufacturing). He stated that job creation in both sectors is necessary and that various factors, such as the housing bubble, hid the lack of job creation in the tradable sector. He stated: "We’re going to have to try to fix the ineffective parts of our educational system...We’re under-investing in things like infrastructure...we’ve just been living on consumption and we need to live a little bit more on investment, including public-sector investment." He also advocated tax policy changes to encourage hiring of U.S. workers.

Former Treasury Secretary Lawrence Summers
Lawrence Summers
Lawrence Henry Summers is an American economist. He served as the 71st United States Secretary of the Treasury from 1999 to 2001 under President Bill Clinton. He was Director of the White House United States National Economic Council for President Barack Obama until November 2010.Summers is the...

 mentioned the importance of economic growth and job creation as critical to addressing the deficit issue during July 2011. The President's 2012 budget forecasts annual real GDP growth averaging 3.2% from 2011-2021 (3.7% from 2011–2016 and 2.6% from 2017-2021.) The change in real GDP was -0.3% in 2008, -3.5% in 2009 and +3.0% in 2010. During 2011, real GDP increased at an annual rate of +0.4% during the first quarter and +1.0% during the second quarter.

Conservative organizations such as the U.S. Chamber of Commerce have advocated growth and employment strategies based on a reduction in government regulations; empowering state education systems; teacher pay for performance strategies; training programs better focused on available jobs; creation of a private and public infrastructure bank to finance investments; tax rate reductions for corporations; free trade agreements; and reducing labor union power.

Balancing economic growth with deficit reduction


Actions can be taken now to encourage economic growth while implementing measures that reduce future deficits. Ben Bernanke
Ben Bernanke
Ben Shalom Bernanke is an American economist, and the current Chairman of the Federal Reserve, the central bank of the United States. During his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis....

 wrote in September 2011: "...the two goals--achieving fiscal sustainability, which is the result of responsible policies set in place for the longer term, and avoiding creation of fiscal headwinds for the recovery--are not incompatible. Acting now to put in place a credible plan for reducing future deficits over the long term, while being attentive to the implications of fiscal choices for the recovery in the near term, can help serve both objectives."

CBO has reported that if current laws are allowed to take effect as scheduled (e.g., if significant tax cuts expire at the end of 2012 and the Budget Control Act of 2011
Budget Control Act of 2011
The Budget Control Act of 2011 was passed by the 112th United States Congress signed into law by President Barack Obama. It brought conclusion to the 2011 United States debt ceiling crisis, which had threatened to lead the United States into sovereign default on or about August 3, 2011.The law...

 is implemented) the short-term deficit problem essentially goes away by 2021, assuming a return to pre-crisis growth rates. Since the path forward on healthcare cost reform is unclear and other countries have much lower costs relative to GDP with comparable results on key measures, various studies could be conducted today to determine future policy actions.

National Research Council strategies


During January 2010, the National Research Council
United States National Research Council
The National Research Council of the USA is the working arm of the United States National Academies, carrying out most of the studies done in their names.The National Academies include:* National Academy of Sciences...

 and the National Academy of Public Administration
National Academy of Public Administration (United States)
The National Academy of Public Administration was founded by James E. Webb, then-administrator of NASA, and other leading public administration practitioners in 1967 and chartered under Title 36 of the United States Code in 1984 under Public Law 98-257. The Academy is a nonprofit, nonpartisan...

 reported a series of strategies to address the problem. They included four scenarios designed to prevent the public debt to GDP ratio from exceeding 60%:


CBO budget options reports


The CBO provides a report discussing the cost and revenue impact of various budget options annually. The CBO also estimated in 2007 that allowing the 2001 and 2003 income tax cuts to expire on schedule in 2010 would reduce the annual deficit by $200–300 billion. In addition, CBO reported that annual defense spending has increased from approximately $300 billion in 2001 (when the budget was last balanced) to $650 billion in 2009.

Republican proposals


Rep. Paul Ryan
Paul Ryan (politician)
Paul Davis Ryan is the U.S. Representative for , serving since 1999. He is a member of the Republican Party and has been ranked among the party's most influential voices on economic policy....

 (R) has proposed the Roadmap for America's Future, which is a series of budgetary reforms. His January 2010 version of the plan includes partial privatization of Social Security, the transition of Medicare to a voucher system, discretionary spending cuts and freezes, and tax reform. A series of graphs and charts summarizing the impact of the plan are included. Economists have both praised and criticized particular features of the plan. The CBO also did a partial evaluation of the bill. The Center for Budget and Policy Priorities (CBPP) was very critical of the Roadmap. Rep. Ryan provided a response to the CBPP's analysis.

The House of Representatives Committee on the Budget, chaired by Paul Ryan, released a budget resolution in April 2011, titled The Path to Prosperity: Restoring America's Promise
The Path to Prosperity
The Path to Prosperity was the Republican Party's budget proposal for the year 2012. It competed with budget proposals outlined separately by President Barack Obama. and the Congressional Progressive Caucus. The Republican proposal was formalized and passed by the House of Representatives on...

. The Path focuses on tax reform (lowering income tax rates and reducing tax expenditures or loopholes); spending cuts and controls; and redesign of the Medicare and Medicaid programs. It does not propose significant changes to Social Security. The CBO did an analysis of the resolution (a less rigorous evaluation than full scoring of legislation), estimating that the Path would balance the budget by 2030 and reduce the level of debt held by the public to 10% GDP by 2050, vs. 62% in 2010. The Path assumes revenue collection of 19% GDP after 2022, up from the current 15% GDP and closer to the historical average of 18.3% GDP. A grouping of spending categories called "Other Mandatory and Defense and Non-Defense Discretionary spending" would be reduced from 12% GDP in 2010 to 3.5% by 2050. Economist Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...

 called it "ridiculous and heartless" due to a combination of income tax rate reductions (which he argued mainly benefit the wealthy) and large spending cuts that would affect the poor and middle classes.

The Republican Party website includes an alternative budget proposal provided to the President in January 2010. It includes lower taxes, lower annual increases in entitlement spending growth, and marginally higher defense spending than the President's 2011 budget proposal. During September 2010, Republicans published "A Pledge to America" which advocated a repeal of recent healthcare legislation, reduced spending and the size of government, and tax reductions. The NYT editorial board was very critical of the Pledge, stating: "...[The Pledge] offers a laundry list of spending-cut proposals, none of which are up to the scale of the problem, and many that cannot be taken seriously."

Fiscal reform commission


President Obama established a budget reform commission, the National Commission on Fiscal Responsibility and Reform
National Commission on Fiscal Responsibility and Reform
The National Commission on Fiscal Responsibility and Reform is a Presidential Commission created in 2010 by President Barack Obama to identify "…policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run."...

, during February, 2010. The Commission "shall propose recommendations designed to balance the budget, excluding interest payments on the debt, by 2015. This result is projected to stabilize the debt-to-GDP ratio at an acceptable level once the economy recovers." Unfortunately the Commission was unable to garner the required supermajority of its members in support of its proposals, and disbanded without issuing an official report to Congress. The final, failed draft report, which received 11 of the required 14 votes for approval, was released to the public in December 2010.

The Commission released a draft of its proposals on November 10, 2010. It included various tax and spend adjustments to bring long-run government tax revenue and spending into line at approximately 21% of GDP. For fiscal year 2009, tax revenues were approximately 15% of GDP and spending was 24% of GDP. The Co-chairs summary of the plan states that it:
  • Achieves nearly $4 trillion in deficit reduction through 2020 via 50+ specific ways to cut outdated programs and strengthen competitiveness by making Washington cut and invest, not borrow and spend.
  • Reduces the deficit to 2.2% of GDP by 2015, exceeding President’s goal of primary balance (about 3% of GDP).
  • Reduces tax rates, abolishes the alternative minimum tax
    Alternative Minimum Tax
    The Alternative Minimum Tax is an income tax imposed by the United States federal government on individuals, corporations, estates, and trusts. AMT is imposed at a nearly flat rate on an adjusted amount of taxable income above a certain threshold . This exemption is substantially higher than the...

    , and cuts backdoor spending (e.g., mortgage interest deductions) in the tax code.
  • Stabilizes debt by 2014 and reduces debt to 60% of GDP by 2024 and 40% by 2037.
  • Ensures lasting Social Security solvency, prevents projected 22% cuts in 2037, reduces elderly poverty, and distributes burden fairly.


The Center on Budget and Policy Priorities
Center on Budget and Policy Priorities
The Center on Budget and Policy Priorities is a non-profit think tank that describes itself as a "policy organization ... working at the federal and state levels on fiscal policy and public programs that affect low- and moderate-income families and individuals."The Center examines the short- and...

 evaluated the draft plan, praising that it "puts everything on the table" but criticizing that it "lacks an appropriate balance between program cuts and revenue increases."

Budgets and April 2011 proposal


President Obama outlined his strategy for reducing future deficits in April 2011 and explained why this debate is important: "...as the Baby Boomers start to retire in greater numbers and health care costs continue to rise, the situation will get even worse. By 2025, the amount of taxes we currently pay will only be enough to finance our health care programs -- Medicare and Medicaid -- Social Security, and the interest we owe on our debt. That’s it. Every other national priority -– education, transportation, even our national security-–will have to be paid for with borrowed money." He warned that interest payments may reach $1 trillion annually by the end of the decade.

He outlined core principles of his proposal, which includes investments in key areas while reducing future expenditures. "I will not sacrifice the core investments that we need to grow and create jobs. We will invest in medical research. We will invest in clean energy technology. We will invest in new roads and airports and broadband access. We will invest in education. We will invest in job training. We will do what we need to do to compete, and we will win the future." He outlined his proposals for reducing future deficits, by:
  • Reducing non-defense discretionary spending, by freezing or limiting increases in future spending;
  • Finding savings in the defense budget, building on $400 billion in savings already identified by Defense Secretary Gates;
  • Reducing healthcare spending, by reducing subsidies and erroneous payments, negotiating for lower prescription drug prices and use of generics, improving efficiencies in the Medicaid program, altering doctor incentives, and empowering a panel of experts to recommend cost-effective treatments and solutions;
  • Strengthening the Social Security program, without reducing commitments to current or future retirees (by implication revenue increases); and
  • Raising revenues, primarily by raising taxes on the wealthy and reducing certain types of tax expenditures.


President Obama's actual 2012 budget proposal was defeated in the Senate by a margin of 0-97 votes.

September 2011 proposal


President Obama announced a 10-year (2012–2021) plan in September 2011 called: "Living Within Our Means and Investing in the Future: The President’s Plan for Economic Growth and Deficit Reduction." The plan included tax increases on the wealthy, along with cuts in future spending on defense and Medicare. Social Security was excluded from the plan. The plan included $3,670 billion in deficit reduction over 10 years, offset by $447 billion in deficit increases (spending and tax cuts) for the proposed American Jobs Act
American Jobs Act
The American Jobs Act and are bills proposed by US President Barack Obama in a nationally televised address to a joint session of Congress on September 8, 2011...

, for a net deficit reduction of $3,222 billion. If the recently passed Budget Control Act of 2011
Budget Control Act of 2011
The Budget Control Act of 2011 was passed by the 112th United States Congress signed into law by President Barack Obama. It brought conclusion to the 2011 United States debt ceiling crisis, which had threatened to lead the United States into sovereign default on or about August 3, 2011.The law...

 is included, this adds another $1,180 billion in deficit reduction for a total of $4,403 billion. Plan estimates indicate that if all these measures were implemented, the deficit in 2021 would be 2.3% GDP or $565 billion. Key categories of savings over the 10 years included in the $3,670 billion are:
  • Mandatory program savings $257B;
  • Health savings $320B;
  • Reduction in military spending related to the wars $1,084B;
  • Tax increases and reform of $1,573B; and
  • Interest cost avoidance $436B.


The Center on Budget and Policy Priorities
Center on Budget and Policy Priorities
The Center on Budget and Policy Priorities is a non-profit think tank that describes itself as a "policy organization ... working at the federal and state levels on fiscal policy and public programs that affect low- and moderate-income families and individuals."The Center examines the short- and...

 supported the proposal, stating: "President Obama proposed a balanced and well-designed package today that would boost economic growth and jobs in the short run while stabilizing federal debt as a share of the economy after 2013. By keeping federal debt held by the public from growing as a share of the economy, the President's proposal would meet the definition of a 'sustainable budget' that economists often use."

Congressional Progressive Caucus "The People's Budget"


The Congressional Progressive Caucus (CPC) consists of 75 members of the House of Representatives and one senator. It proposed "The People's Budget" in April 2011, which includes the following recommendations, which it claims would balance the budget by 2021 while maintaining debt as a % GDP under 65%:
  • Reversing most of the Bush tax cuts;
  • Reinstating historical marginal income tax rates of approximately 50% on income earners over $1 million;
  • Taxing capital gains and qualified dividends as ordinary income;
  • Raising the income tax cap ($106,800) on the Social Security payroll tax;
  • Restoring the estate tax;
  • Reducing tax subsidies for corporations, particularly in the oil and gas industries;
  • Ending overseas contingency defense spending for the wars in Iraq and Afghanistan;
  • Reducing defense spending overall and reducing the U.S. global defense footprint;
  • Investing in a jobs program; and
  • Implementing a public option to reduce healthcare costs.


The Economic Policy Institute
Economic Policy Institute
The Economic Policy Institute is a 501 non-profit, liberal, nonpartisan think tank that seeks to broaden the public debate about strategies to achieve a prosperous and fair economy...

, a liberal think tank, evaluated the proposal. The Economist also discussed it. Economist Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...

 wrote in April 2011: "It’s worth pointing out that if you want to balance the budget in 10 years, you pretty much must do it largely by cutting defense and raising taxes; you can’t make huge cuts in the rest of the budget without inflicting extreme pain on millions of Americans."

Other solution proposals


The Peter G. Peterson Foundation solicited proposals from six organizations, which included the American Enterprise Institute, the Bipartisan Policy Center
Bipartisan Policy Center
The is a non-profit organization that "drives principled solutions through rigorous analysis, reasoned negotiation, and respectful dialogue." Founded in 2007 by former Senate Majority Leaders Howard Baker, Tom Daschle, Bob Dole, and George Mitchell, "BPC combines politically-balanced policymaking...

, the Center for American Progress, the Economic Policy Institute, The Heritage Foundation, and the Roosevelt Institute Campus Network. These proposals were reviewed by a former CBO director and the Tax Policy Institute to provide a common scoring mechanism. The recommendations of each group were reported in May 2011.

The Bipartisan Policy Center
Bipartisan Policy Center
The is a non-profit organization that "drives principled solutions through rigorous analysis, reasoned negotiation, and respectful dialogue." Founded in 2007 by former Senate Majority Leaders Howard Baker, Tom Daschle, Bob Dole, and George Mitchell, "BPC combines politically-balanced policymaking...

 sponsored a Debt Reduction Task Force, co-chaired by Pete V. Domenici and Alice M. Rivlin. This panel created a report called "Restoring America's Future," which was published in November 2010. The plan claimed to stabilize the debt to GDP ratio at 60%, with up to $6 trillion in debt reduction over the 2011-2020 period. Specific plan elements included:
  • Freeze defense spending for 5 years, after which defense spending would be held to the rate of GDP growth;
  • Freeze non-defense discretionary spending for 4 years, after which it would be capped at the rate of GDP growth;
  • Reduce the current six income tax rates to just two (15% and 27%). It would reduce the corporate tax rate to 27% from 35% today. The panel would also eliminate most tax expenditures (roughly $1 trillion per year), with the exception of the mortgage interest and charitable deductions.
  • Implement a national sales tax or value-added tax (VAT), starting at 3% in 2012 and rising to 6.5% by 2013.
  • Reform Social Security, by raising the cap on the payroll tax, reducing the annual cost of living adjustment, and reducing benefits for those who retire early.

Conclusion and next steps


The CBO reported in September 2011 that: "Given the aging of the population and rising costs for health care, attaining a sustainable federal budget will require the United States to deviate from the policies of the past 40 years in at least one of the following ways:
  • Raise federal revenues significantly above their average share of GDP;
  • Make major changes to the sorts of benefits provided for Americans when they become older; or
  • Substantially reduce the role of the rest of the federal government relative to the size of the economy."


During testimony before the Congressional Joint Deficit Reduction Committee in September 2011, CBO Director Douglas Elmendorf counseled members of Congress to make decisions about the role of the federal government, then make policy choices to obtain the revenue necessary to fund those roles, to put the U.S. on a sustainable fiscal path.

How urgently should the U.S. put plans in place to address it's budget challenges? Fed Chair Ben Bernanke
Ben Bernanke
Ben Shalom Bernanke is an American economist, and the current Chairman of the Federal Reserve, the central bank of the United States. During his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis....

 stated in January 2007: "The longer we wait, the more severe, the more draconian, the more difficult the objectives are going to be. I think the right time to start was about 10 years ago."

Total outlays in recent budget submissions



  • 2012 United States federal budget
    2012 United States federal budget
    The 2012 United States federal budget is the United States federal budget to fund government operations for the fiscal year 2012, which is October 2011–September 2012...

     - $3.7 trillion (submitted 2011 by President Obama
    Barack Obama
    Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...

    )
  • 2011 United States federal budget
    2011 United States federal budget
    The 2011 United States federal budget is the United States federal budget to fund government operations for the fiscal year 2011, which is October 2010–September 2011. The budget is the subject of a spending request by President Barack Obama...

     - $3.8 trillion (submitted 2010 by President Obama)
  • 2010 United States federal budget
    2010 United States federal budget
    The United States Federal Budget for Fiscal Year 2010, titled A New Era of Responsibility: Renewing America's Promise, is a spending request by President Barack Obama to fund government operations for October 2009–September 2010...

     - $3.6 trillion (submitted 2009 by President Obama)
  • 2009 United States federal budget - $3.1 trillion (submitted 2008 by President Bush
    George W. Bush
    George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....

    )
  • 2008 United States federal budget - $2.9 trillion (submitted 2007 by President Bush)
  • 2007 United States federal budget - $2.8 trillion (submitted 2006 by President Bush)
  • 2006 United States federal budget - $2.7 trillion (submitted 2005 by President Bush)
  • 2005 United States federal budget
    2005 United States federal budget
    The United States Federal Budget for Fiscal Year 2005, was a spending request by President George W. Bush to fund government operations for October 2004-September 2005. Figures shown in the spending request do not reflect the actual appropriations for Fiscal Year 2005, which must be authorized by...

     - $2.4 trillion (submitted 2004 by President Bush)
  • 2004 United States federal budget
    2004 United States federal budget
    The United States federal budget for fiscal year 2005 is a spending request by President Bush to fund government operations for the year 2005....

     - $2.3 trillion (submitted 2003 by President Bush)
  • 2003 United States federal budget
    2003 United States federal budget
    The United States Federal Budget for Fiscal Year 2003, was a spending request by President George W. Bush to fund government operations for October 2002-September 2003. Figures shown in the spending request do not reflect the actual appropriations for Fiscal Year 2003, which must be authorized by...

     - $2.2 trillion (submitted 2002 by President Bush)
  • 2002 United States federal budget
    2002 United States federal budget
    The United States Federal Budget for Fiscal Year 2002, was a spending request by President George W. Bush to fund government operations for October 2001-September 2002. Figures shown in the spending request do not reflect the actual appropriations for Fiscal Year 2002, which must be authorized by...

     - $2.0 trillion (submitted 2001 by President Bush)
  • 2001 United States federal budget
    2001 United States federal budget
    The United States Federal Budget for Fiscal Year 2001, was a spending request by President Bill Clinton to fund government operations for October 2000-September 2001. Figures shown in the spending request do not reflect the actual appropriations for Fiscal Year 2001, which must be authorized by...

     - $1.9 trillion (submitted 2000 by President Clinton
    Bill Clinton
    William Jefferson "Bill" Clinton is an American politician who served as the 42nd President of the United States from 1993 to 2001. Inaugurated at age 46, he was the third-youngest president. He took office at the end of the Cold War, and was the first president of the baby boomer generation...

    )
  • 2000 United States federal budget
    2000 United States federal budget
    The United States Federal Budget for Fiscal Year 2000, was a spending request by President Bill Clinton to fund government operations for October 1999-September 2000. Figures shown in the spending request do not reflect the actual appropriations for Fiscal Year 2000, which must be authorized by...

     - $1.8 trillion (submitted 1999 by President Clinton)
  • 1999 United States federal budget
    1999 United States federal budget
    The Budget of the United States Government Fiscal Year 1999 was a spending request by President Bill Clinton to fund government operations for October 1998–September 1999. It was the first balanced Federal budget in 30 years. In FY99, revenues were 1.82 trillion dollars...

     - $1.7 trillion (submitted 1998 by President Clinton)
  • 1998 United States federal budget
    1998 United States federal budget
    The United States Federal Budget for Fiscal Year 1998, was a spending request by President Bill Clinton to fund government operations for October 1997-September 1998. Figures shown in the spending request do not reflect the actual appropriations for Fiscal Year 1998, which must be authorized by...

     - $1.7 trillion (submitted 1997 by President Clinton)
  • 1997 United States federal budget
    1997 United States federal budget
    The United States Federal Budget for Fiscal Year 1997, was a spending request by President Bill Clinton to fund government operations for October 1996-September 1997. Figures shown in the spending request do not reflect the actual appropriations for Fiscal Year 1997, which must be authorized by...

     - $1.6 trillion (submitted 1996 by President Clinton)
  • 1996 United States federal budget
    1996 United States federal budget
    The United States Federal Budget for Fiscal Year 1996, was a spending request by President Bill Clinton to fund government operations for October 1995-September 1996. Figures shown in the spending request do not reflect the actual appropriations for Fiscal Year 1996, which must be authorized by...

     - $1.6 trillion (submitted 1995 by President Clinton)


The President's budget also contains revenue and spending projections for the current fiscal year, the coming fiscal years, as well as several future fiscal years. In recent years, the President's budget contained projections five years into the future. The Congressional Budget Office (CBO) issues a "Budget and Economic Outlook" each January and an analysis of the President's budget each March. CBO also issues an updated budget and economic outlook in August.

Actual budget data for prior years is available from the Congressional Budget Office and from the Office of Management and Budget (OMB).

Basic budget terms (based on GAO Glossary)


Appropriations
"Budget authority to incur obligations and to make payments from the Treasury for specified purposes."

Budget Authority
"Authority provided by federal law to enter into financial obligations that will result in immediate or future outlays involving federal government funds."

Outlay
"The issuance of checks, disbursement of cash, or electronic transfer of funds made to liquidate a federal obligation." The term "outlays" is usually synonymous with "expenditure" or "spending."

The amount of budget authority and outlays for a fiscal year usually differ because budget authority from a previous fiscal year in some cases can be used for outlays in the current fiscal year. Some military and some housing programs have multi-year appropriations, in which budget authority is specified for several coming fiscal years.

See also

  • 2011 U.S. debt ceiling crisis
  • Starve the beast
    Starve the beast
    "Starving the beast" is a fiscal-political strategy of some American conservatives to cut taxes in order to deprive the government of revenue in a deliberate effort to create a fiscal budget crisis that would then force the federal government to reduce spending...

     (policy)
  • Government budget by country
    Government budget by country
    This article includes a chart representing revenues, expenditures and resulting deficit or surplus of government budget. The countries are ranked by budget revenues. The data is taken mainly from CIA World Factbook....

  • Modern Monetary Theory
  • The Federal Budget Process

Recent CBO documents


"Chart talk" examples


One of the best ways to understand the long-term budget risks is through helpful charts. The following sources contain charts and commentary:

Budget games and simulations


External links