Was the FY 2008 Budget Revenue Projection Realistic?:
The U.S. FY 2008 Budget, prepared by the Office of Management and Budget (
OMB), predicted revenue would come in at $2.662 trillion. It actually received less, at $2.524 trillion in revenue. The forecast wasn't realistic, since it was based on revenues of $2.407 trillion in
FY 2006. OMB forecast revenue would grow to $3.307 trillion by 2012, providing enough to balance the U.S. budget. It would only 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 were realistic:
- Were the GDP forecasts realistic?
-
Were revenue projections accurate?
-
Did the budget postpone a revenue crisis?
Were the GDP Forecasts Realistic?:
OMB forecast the economy, as measured by annual GDP growth, would increase at about 3% per year from 2007-2012. This was only slightly more optimistic than the Congressional Budget Office
(CBO)
(2.8%), or the
Blue Chip Consensus (2.9%).
However, the OMB started with a higher base. It forecast FY 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 was 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)
Were Revenue Projections Accurate?:
Although keeping revenue projections at a steady 18.3% of GDP seemed reasonable, the composition of that revenue base shifted more of the tax burden onto individuals over the next five years. In FY 2006, 43% of revenue was from individual taxpayers, while 22% was from corporate taxes, excise taxes, and the like. By
FY 2012,OMB predicted that the individual taxpayer burden had grown to 49% of revenue, with 16% from corporate and excise taxes.
This shift occurred even though the budget forecast assumed that the Economic Growth and Tax Relief Reconciliation Act of 2001 (
EGTRRA) and the
Jobs Growth and Tax Relief Reconciliation Act of 2003 (
JGTRRA) would remain in place. When passed, the Administration promised that these tax relief bills would “sunset”, or end, in 2010. However, it's difficult for politicians to reinstate higher taxes after cuts have been in place for 10 years, even knowing that estimated revenue loss would be about $1.3 trillion. As it turned out, it was impossible to do in an election year, as the Bush tax cuts became the
Obama tax cutsBudget Assumed $60 Billion Annually from AMT
The shift was because OMB didn't factor 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 was overstated for FY 2009-2012 by about $60 billion each year.
Budget Borrowed $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 increased from $837 billion in FY 2006 to a projected $1,138 billion in FY 2012. Of that, only one-fourth was used to pay benefits to current retirees. Much of the rest of it was "borrowed" to pay for FY 2008 spending. That year, $674 billion was borrowed. Who will pay it back? Our children and grandchildren.
Did the Budget Postpone a Revenue Crisis?:
Although the budget forecast a balanced budget by 2012, this did not mean a restoration to fiscal health, for several reasons:
- It counted tax receipts from the AMT, when in fact each year a temporary exemption is enacted. Therefore, the budget overstated revenue by $60 billion per year...about the amount of the so-called surplus in 2012.
-
“Borrowed” funds from Social Security payroll taxes were projected to 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 reached a “balanced budget” by postponing two important revenue crises: fixing the AMT, and providing for Social Security benefits. (Updated April 20, 2011)
