Friday, 28 November 2014 / TRUTH-OUT.ORG

Updating October's Long-Term Debt Projections

Monday, 02 January 2012 05:50 By James Kwak, The Baseline Scenario | News Analysis

Click here to view larger.

Back in October, I wrote a post laying out my long-term projections for the national debt, which were basically an adjustment to existing CBO projections. Peter Berezin recently pointed out a misleading ambiguity in that post. There, I used the same long-term growth rate of tax revenues in both my extended-baseline scenario and in my “realistic” scenarios. I got that long-term growth rate from the CBO’s extended baseline scenario in its 2011 Long-Term Budget Outlook, which assumes that current law remains unchanged. In my realistic scenarios, I assumed that the AMT would be adjusted through 2021 but that the long-term growth rate would apply thereafter. I didn’t say anything explicitly about the AMT after 2021, but by using the long-term growth rate from the extended baseline, I was implicitly assuming that the AMT would not be indexed after 2021.

This is certainly a possible policy choice, but I think it is optimistic (from a budgetary perspective), and a more conservative assumption is that the AMT will be indexed forever. This means that you would have to use the long-term growth rate from a world in which the AMT is indexed. Such a world is portrayed in the CBO’s 2009 Long-Term Budget Outlook, alternative fiscal scenario, Figure 5-1. (The 2011 alternative fiscal scenario assumes instead that taxes will remain constant as a share of GDP.) By my calculation (from the Additional Info spreadsheet), the long-term growth rate of tax revenues is 0.3 percent per year (over the 2021–2080 period). So I’ve adjusted my spreadsheet to use this growth rate instead.

This yields the projections shown in the figure above. As before, the red lines are the CBO projections from June, the green lines are my adjustments to those projections based on more recent information, and the blue lines are the scenarios that I think are more realistic—one assuming expiration of the Bush tax cuts, one assuming extension.

The most important point remains the same: If we let the Bush tax cuts expire, the national debt will be significant and rising in the long term, but will not be that much larger than today even in 2035. Which means that the national debt problem over the next twenty-five years is as much about tax cuts as about entitlement spending.

(This update also reflects a couple of small technical corrections, which barely changed the numbers.)


Hide Comments

blog comments powered by Disqus
GET DAILY TRUTHOUT UPDATES

FOLLOW togtorsstottofb


Updating October's Long-Term Debt Projections

Monday, 02 January 2012 05:50 By James Kwak, The Baseline Scenario | News Analysis

Click here to view larger.

Back in October, I wrote a post laying out my long-term projections for the national debt, which were basically an adjustment to existing CBO projections. Peter Berezin recently pointed out a misleading ambiguity in that post. There, I used the same long-term growth rate of tax revenues in both my extended-baseline scenario and in my “realistic” scenarios. I got that long-term growth rate from the CBO’s extended baseline scenario in its 2011 Long-Term Budget Outlook, which assumes that current law remains unchanged. In my realistic scenarios, I assumed that the AMT would be adjusted through 2021 but that the long-term growth rate would apply thereafter. I didn’t say anything explicitly about the AMT after 2021, but by using the long-term growth rate from the extended baseline, I was implicitly assuming that the AMT would not be indexed after 2021.

This is certainly a possible policy choice, but I think it is optimistic (from a budgetary perspective), and a more conservative assumption is that the AMT will be indexed forever. This means that you would have to use the long-term growth rate from a world in which the AMT is indexed. Such a world is portrayed in the CBO’s 2009 Long-Term Budget Outlook, alternative fiscal scenario, Figure 5-1. (The 2011 alternative fiscal scenario assumes instead that taxes will remain constant as a share of GDP.) By my calculation (from the Additional Info spreadsheet), the long-term growth rate of tax revenues is 0.3 percent per year (over the 2021–2080 period). So I’ve adjusted my spreadsheet to use this growth rate instead.

This yields the projections shown in the figure above. As before, the red lines are the CBO projections from June, the green lines are my adjustments to those projections based on more recent information, and the blue lines are the scenarios that I think are more realistic—one assuming expiration of the Bush tax cuts, one assuming extension.

The most important point remains the same: If we let the Bush tax cuts expire, the national debt will be significant and rising in the long term, but will not be that much larger than today even in 2035. Which means that the national debt problem over the next twenty-five years is as much about tax cuts as about entitlement spending.

(This update also reflects a couple of small technical corrections, which barely changed the numbers.)


Hide Comments

blog comments powered by Disqus