3.4: Fiscal Position and Gap
Analyze the Government’s Fiscal Position and Strengthen Approaches for Addressing the Current and Projected Fiscal Gap Other Information:
The federal budget is the principal annual vehicle through which the Congress and the President balance competing views about
allocating federal resources, accountability for those resources, and allocating responsibility between the public and private
sectors and among levels of government. The nation continues to run large budget deficits, and the squeeze on the federal
budget from the impending retirement of the baby boom generation is becoming more apparent in the 10-year budget window. Our
long-term budget model has consistently suggested that without changes to the major retirement and health care programs, the
nation will ultimately have to choose between escalating federal deficits and debt, significant tax increases, and dramatic
budget cuts in other areas. Under the Congressional Budget Office’s current 10-year budget and economic outlook, economic
growth is projected to be about half a percentage point lower on average after 2008 because labor force growth will slow as
the baby boom generation begins to retire. At the same time, the already rapid growth in entitlement spending for Social Security,
Medicare, and Medicaid is projected to accelerate. As such, it will be increasingly difficult to address today’s urgent needs
without unduly exacerbating the nation’s long-term fiscal challenges. While Social Security and Medicare dominate the long-term
outlook, they are not the only federal programs or activities that bind the future. Indeed, the federal government undertakes
a wide range of programs, responsibilities, and activities that obligate it to future spending or create expectations for
spending. Making government fit the challenges of the future will require not only dealing with the drivers—entitlements for
the elderly—but also looking at the range of other federal activities. However, the budget controls instituted to achieve
balance in the past have expired, and no agreement has been reached on the appropriate structure or process for focusing on
the fiscal challenges that now move to center stage. Part of the solution to the long-term fiscal challenges will have to
come on the revenue side of the federal budget. This will involve reexamining not only the amount of revenue needed to finance
federal expenditures but also how that revenue is raised. The amount of revenue raised to finance federal spending has remained
fairly stable over the last several decades when measured as a share of GDP. Revenue would have to increase if growth in federal
spending is not controlled. Tax policy, which determines the design of our nation’s tax system and thus how a given amount
of revenue is raised, has profound effects on the economy as a whole and on the decisions that individuals and businesses
make about working, saving, and investing. The federal tax system includes numerous tax provisions intended to influence taxpayers’
behavior throughout the economy, but little is known about the effects of many of these provisions. Given the size and complexity
of the federal tax code, the Congress remains interested in tax reform, particularly its simplification. Among the many causes
of complexity is the growing number of exemptions and exclusions from taxation, deductions, credits, deferral of tax liability,
and preferential tax rates. The federal tax system includes numerous tax provisions intended to influence taxpayers’ behavior
throughout the economy, but little is known about the effects of many of these provisions. Given the size and complexity of
the federal tax code, the Congress remains interested in tax reform, particularly its simplification. Among the many causes
of complexity is the growing number of exemptions and exclusions from taxation, deductions, credits, deferral of tax liability,
and preferential tax rates. The number of tax expenditures reported by the Department of the Treasury has more than doubled
since 1974, and the sum of revenue loss estimates for tax expenditures was nearly $847 billion in 2006.
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