U.S. Federal Budget FY 2008 - Revenue Projections

In FY 2006, the U.S. government operated with $2.407 trillion in revenue. The U.S. FY 2008 Budget for FY 2008, prepared by the Office of Management and Budget (OMB), forecasts revenue to grow to $3.307 trillion by 2012, providing enough to balance the U.S. budget. Revenue is forecast to consume 18.3% of GDP, remaining at the same levels of FY 2006 and FY 2007. (Source: OMB Budget FY 2008, Summary Tables Table S-1. Budget Totals.)

Three questions must be answered to determine whether the revenue projections are realistic:

1. Are the GDP forecasts realistic?
2. Are revenue projections accurate?
3. Does the budget postpone a revenue crisis?

OMB forecasted that the economy, as measured by annual GDP growth, will increase at about 3% per year from 2007-2012. This is only slightly more optimistic than the Congressional Budget Office (CBO) (2.8%), or the Blue Chip Consensus (2.9%).

However, the OMB starts with a higher base. It forecasts 2007 GDP growth at 2.7% , a little higher than the CBO (2.3%) and the Blue Chip Consensus (2.4%). Even so, the OMB projection is not unreasonable, given that the Bureau of Economic Analysis estimated Q4 2006 GDP growth at 3.4%, and 2005 GDP growth at 3.5%. (Source: OMB Budget FY 2008, Summary Tables Table S-9. Comparison of Economic Assumptions)

Although keeping revenue projections at a steady 18.3% of GDP seems reasonable, the composition of that revenue base shifts more of the tax burden onto individuals over the next five years. In FY 2006, 43% of revenue is from individual taxpayers, while 22% is from corporate taxes, excise taxes, and the like. By FY 2012, the individual taxpayer burden has grown to 49% of revenue, with 16% from corporate and excise taxes.

This shift occurs even though the budget forecast assumes that the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs Growth and Tax Relief Reconciliation Act of 2003 (JGTRRA) remain in place. When passed, the Administration promised that these tax relief bills would “sunset”, or end, in 2010. However, it is very difficult for politicians to reinstate higher taxes after the cuts have been in place for 10 years, even knowing that estimated revenue loss will be about $1.3 trillion.

Budget Assumes $60 Billion Annually from AMT

The shift is because the OMB has not factored in a change in the Alternative Minimum Tax (AMT). The AMT was created in 1969 to make sure the wealthiest taxpayers did not avoid taxes through loopholes. Unfortunately, there was no inflation adjustment built in, so each year the AMT applies to more families who are now wealthy by 1969 standards. Instead of rewriting the law, legislators provide an exemption for that year only. As a result, tax revenue is overstated for FY 2009-2012 by about $60 billion each year.

Budget Borrows $674 Billion in FY 2008 From Social Security

Combined, individual and corporate taxes only contribute 65% of revenue. The remaining 35% is from Social Security and Medicare payroll taxes. This amount increases from $837 billion in FY 2006 to $1,138 billion in FY 2012. Of that, only one-fourth is used to pay benefits to current retirees.

Through 2017, Social Security will collect more in tax revenues than it pays out in benefits. That is because there are 3.3 workers for every beneficiary and the tax rate is 12.4%. Although the excess revenue is deposited into a trust fund, it is immediately borrowed by the U.S. Treasury to use for other programs. Therefore, in FY 2008, $674 billion in receipts is “borrowed” from the Social Security trust fund.

Although the budget forecasts a balanced budget by 2012, this does not mean a restoration to fiscal health, for several reasons:

• It counts tax receipts from the AMT, when in fact each year a temporary exemption is enacted. Therefore, the budget overstates revenue by $60 billion per year...about the amount of the so-called surplus in 2012.
• “Borrowed” funds from Social Security payroll taxes will total $835 billion in 2012. This is money that will not be available to pay retirement benefits to Baby Boomers, who begin to become eligible in 2007.

Therefore, this budget reaches a “balanced budget” by postponing two important revenue crises: fixing the AMT, and providing for Social Security benefits.