CBO long-term budget outlook shows nothing new

The Congressional Budget Office (CBO) released the 2011 Long-Term Budget Outlook yesterday. As you might expect, both sides are talking up the aspects of the report that play to their talking points. For example, if you listen to our progressive/liberal friends, they’re quick to point to charts in the report showing that budget deficits wouldn’t be as large if the 2001/2003 tax cuts hadn’t been extended. Of course, most, if any at all, don’t acknowledge that the CBO also says this in the report:

Changes in marginal tax rates (the rates that apply to an additional dollar of a taxpayer’s income) also affect output. For example, a lower marginal tax rate on capital income (income derived from wealth, such as stock dividends, realized capital gains, or the owner’s profits from a business) increases the after-tax rate of return on saving, strengthening the incentive to save; more saving implies more investment, a larger capital stock, and greater output. However, if that lower marginal tax rate increases people’s after-tax returns on savings, they do not need to save as much to have the same future standard of living, which reduces the supply of saving. CBO concludes, as do most analysts, that the former effect outweighs the latter, such that a lower marginal tax rate on capital income increases saving. A higher marginal tax rate on capital income has the opposite effect.

Similarly, a lower marginal tax rate on labor income increases the incentive to work, raising the number of hours people work and therefore the amount of output. However, if that lower marginal tax rate increases people’s after-tax income from the work they are already doing, then they do not need to work as much to maintain their standard of living, which reduces the supply of labor. Again, CBO concludes, as do most analysts, that the former effect outweighs the latter and that lower marginal tax rates on labor income increase the labor supply. A higher marginal tax rate on labor income has the opposite effect.

Not to mention that raising taxes would also slow economic growth. Additionally, liberals don’t ackwowledge that revenues as a percentage of GDP under the CBO’s baseline projection, which isn’t ground in reality anyway, would be at 23%; extraordinarily high considering that revenues have rarely eclipsed 20% in the last 70 years. While all federal spending will be around the same as revenues, 23% of GDP, under the baseline projections, they fail to discuss the impact of entitlements, which will consume 15% of GDP by 2035. Including entitlements, federal spending as a percent of GDP has averaged around 18% of the last several decades. So we’re talking about entitlements consuming nearly all of historical federal spending as a percentage of GDP in the next 25 years.

Our statist friends see this as business as usual. They say, “We’ll have a balanced budget!” Of course, that assumes that Congress follows through on certain cuts, such as cutting Medicare payouts to health care providers, and other things projected to happen, as the law is currently written, actually happens. However, history says they won’t.

What they aren’t saying is that government will have grown at a pace that we haven’t seen since or before the Great Depression. But don’t look at the details, all they want to you to see is that the deficit is gone and we’d have a balanced budget. Nevermind we’d have a government with much more spending as a percentage of GDP than we’ve seen historically, higher taxes and slower economic growth. Then again, that’s what the statists want.

The American Spectator has some of the charts our liberal/progressive friends won’t talk about. Chris Edwards also has some thoughts on the report over at Cato.


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