Tag: cbo

Two Problems with the CBO’s Score of the DREAM Act and One Solution

The Congressional Budget Office (CBO) recently released a fiscal impact score for the DREAM Act.  It found that the DREAM Act would increase deficits by about $25.9 billion over the next decade.  There are at least two problems with this CBO score and a solution that should make fiscal conservatives and DREAM Act supporters happy.    

What is the Baseline?

The CBO’s black box fiscal estimates are frequently frustrating and this one is no exception.  The biggest difficulty is telling what their baseline is.  Their baseline could be that 700,000 DACA recipients continue to work legally, which is roughly the current situation but will continue to decline rapidly over the next few years as DACA disintegrates.  The baseline could also assume zero government costs incurred while identifying and deporting immigrants who would otherwise have been legalized, an unrealistic assumption given that this administration is building up an internal deportation apparatus. 

The American Action Forum (AAF) has estimated the federal government’s cost of deportation and indirect costs on GDP.  The AAF findings suggest that removing DACA recipients and DREAMers over the next decade will increase government expenditures by $70 billion to $103 billion and lower GDP growth by about $260 billion.  Both of those swamp and fiscal effects from the DREAM Act.  If the AAF estimates are the baseline, the DREAM Act would actually save hundreds of billions of dollars over the next decade.   

It is difficult to estimate what immigration enforcement will be like over the next decade but at least some of those large costs should be included as part of the baseline in any CBO fiscal cost analysis.  The choice of baseline matters in whether the DREAM Act will be scored as fiscally positive, negative, or neutral.

The CBO versus the National Academy of Sciences

The findings of the CBO report are inconsistent with the National Academy of Sciences (NAS) fiscal cost projection for first-generation immigrants.  The age and education of the immigrants are the two biggest factors that influence their net fiscal impact.  The greater the education and younger the age at arrivals (with some caveats), the more fiscally positive the immigration is.  In contrast, the less educated and older the age at arrival (same caveats), the less fiscally positive the immigrants is.  

Applying the age and education profiles of DACA recipients to NAS findings by age and education in table 8-21 reveals startlingly different results from that of the CBO (Figure 1).  Figure 1 shows the average net fiscal impact by DREAMers by year after legalization.  Just counting the 700,000 DACA recipients should produce a fiscally positive result over the next decade of about $1.6 billion using the NAS methods.  Expanding this to the roughly 2 million or so eligible DREAMers, assuming they have about the same education and age profiles, should produce about $4.6 billion in net positive tax revenues over the next decade.      

Figure 1: Average Fiscal Impact per DREAMers by Year

 

Sources: National Academy of Sciences, Migration Policy Institute, Pew Research, and Author’s Calculations.

This result comes from the age profile of DACA recipients and DREAMers, not from assuming that they will be highly educated.  For the CBO to find that legalization will turn a $1.6 to $4.6 billion dollar surplus into a $25.9 billion deficit requires an enormous increase in benefit usage or a tremendous drop in taxable income or both at exactly the age when benefit receipts drop and taxable income rises for immigrants (Figure 2). 

Figure 2: Taxes minus Benefits for Immigrants, by Age

 

Source: National Academy of Sciences.

Either the NAS is tremendously wrong in its widely praised fiscal cost analysis or the CBO made unrealistic projections and assumptions, perhaps having to do with a possible uptick in family-sponsored immigration after the DREAM Act.  Regardless, one cannot praise the NAS findings and believe the CBO’s.     

Hedging Our Fiscal Bets

Even if you assume that the CBO’s findings are closer to reality than those of the NAS’, there is an easy solution that Republicans should leap for: welfare reform.  As Cato scholars have written about in detail, it is easy, popular, and fiscally prudent to limit non-citizen access to means-tested welfare benefits.  As part of a DREAM Act, Congress could include stricter welfare rules denying all non-citizens access to means-tested welfare, tax credits, and health insurance subsidies.  Congress could then create a special green card for DACA recipients and DREAMers, call it the DLPR, which they cannot use to naturalize for 10 years.  In such a case, they work legally and pay taxes without access to benefits for a decade when they will then have a choice.  Permanently protecting a large population from deportation while also making this fiscal cost argument moot is a good deal and should be taken regardless of CBO findings.       

How Is Revenue Neutrality to Be Judged?

Any serious efforts to improve the tax system inevitably comes up against dubious assertions that such changes won’t improve economic growth or reduce tax avoidance, and will therefore not be “revenue neutral” but will simply increase deficits and debt for no reason.

The easiest way to block growth-oriented tax reforms is to insist that any such changes must be “revenue neutral” even in the short run.  However, that goal typically relies on uncritical acceptance of dubious estimates of (1) how much “baseline” revenue the existing system will bring in over 10-20 years, and (2) how much revenue a better tax system would bring in under the conventional and official assumption that higher or lower marginal tax rates on added income have no significant effect on anything.

As Harvard economist Greg Mankiw importantly notes, “A key question is how revenue neutrality is to be judged.” 

Before Congress could even attempt to be “revenue neutral” they must first have credible estimates of future revenue under the current tax regime.  Unfortunately, the Congressional Budget Office and Joint Committee on Taxation have so far provided only incredible projections.  

Here are links to my critiques of official revenue projections for corporate and individual income taxes. 

For Congress to judge “revenue neutrality” on the basis of these extremely flawed hyper-static CBO/JCT estimates would be economically and fiscally irresponsible.

Legislative Malpractice: the CBO Scores the American Health Care Act

The Congressional Budget Office’s cost estimate of the American Health Care Act confirms what health-policy scholars have known for months: the AHCA is bad health policy that will come back to haunt its Republican supporters.

Premiums on the individual market have risen an average of 105 percent since ObamaCare took effect. Maryland’s largest insurer has requested rate hikes for 2018 that average 52 percent. Yet the CBO estimates the AHCA would saddle voters with two additional premium increases before the mid-term elections—a further 20 percent increase in 2018, plus another 5 percent just before Election Day. Even worse, the bill’s ham-handed modifications to ObamaCare’s most harmful regulations would accelerate the race to the bottom that ObamaCare has begun. Voters will blame Republicans for their skyrocketing premiums and lousy coverage, deepening what appear to be inevitable GOP losses in 2018.

Free-market reforms would reduce premiums by up to 90 percent, make access to care more secure for people who develop expensive medical conditions, reduce taxes and health care prices, and give states the ability and flexibility to cover preexisting conditions. It might even give the GOP’s base a reason to go to the polls in 2018.

The AHCA is not free-market reform.

Six Sobering Charts about America’s Grim Future from CBO’s New Report on the Long-Run Fiscal Outlook

I sometimes feel like a broken record about entitlement programs. How many times, after all, can I point out that America is on a path to become a decrepit European-style welfare state because of a combination of demographic changes and poorly designed entitlement programs?

But I can’t help myself. I feel like I’m watching a surreal version of Titanic where the captain and crew know in advance that the ship will hit the iceberg, yet they’re still allowing passengers to board and still planning the same route. And in this dystopian version of the movie, the tickets actually warn the passengers that tragedy will strike, but most of them don’t bother to read the fine print because they are distracted by the promise of fancy buffets and free drinks.

We now have the book version of this grim movie. It’s called The 2017 Long-Term Budget Outlook and it was just released today by the Congressional Budget Office.

If you’re a fiscal policy wonk, it’s an exciting publication. If you’re a normal human being, it’s a turgid collection of depressing data.

But maybe, just maybe, the data is so depressing that both the electorate and politicians will wake up and realize something needs to change.

I’ve selected six charts and images from the new CBO report, all of which highlight America’s grim fiscal future.

The first chart simply shows where we are right now and where we will be in 30 years if policy is left on autopilot. The most important takeaway is that the burden of government spending is going to increase significantly.

New CBO Numbers Confirm Simple Task of Balancing the Budget with Modest Spending Restraint

It’s not a big day for normal people, but today is exciting for fiscal policy wonks because the Congressional Budget Office has released its new 10-year forecast of how much revenue Uncle Sam will collect based on current law and how much the burden of government spending will expand if policy is left on auto-pilot.

Most observers will probably focus on the fact that budget deficits are projected to grow rapidly in future years, reaching $1 trillion in 2024.

That’s not welcome news, though I think it’s far more important to focus on the disease of too much spending rather than the symptom of red ink.

But let’s temporarily set that issue aside because the really big news from the CBO report is that we have new evidence that it’s actually very simple to balance the budget without tax increases.

According to CBO’s new forecast, federal tax revenue is projected to grow by an average of 4.3 percent each year, which means receipts will jump from 3.28 trillion this year to $4.99 trillion in 2026.

And since federal spending this year is estimated to be $3.87 trillion, we can make some simple calculation about the amount of fiscal discipline needed to balance the budget.

A spending freeze would balance the budget by 2020. But for those who want to let government grow at 2 percent annually (equal to CBO’s projection for inflation), the budget is balanced by 2024.

So here’s the choice in front of the American people. Either allow spending to grow on autopilot, which would mean a return to trillion dollar-plus deficits within eight years. Or limit spending so it grows at the rate of inflation, which would balance the budget in eight years.

Seems like an obvious choice.

CBO Projections Are No Basis for Claiming Tax Reform “Loses Trillions”

I recently wrote in The Hill on Donald Trump’s fiscal plan. The graph below clarifies some of my comments.

CBO REVENUE PROJECTIONS

Estimates purporting to show the new, evolving Trump/Ryan Tax Reform must “lose trillions” over 10-20 years are usually static – meaning they assume lower marginal tax rates on labor and capital have zero effect on economic growth or tax avoidance.  Yet that is a relatively small part of the problem.

Even if static estimates made any sense, the alleged revenue losses would still be wildly exaggerated because they compare estimated revenues from reform plans with “baseline” revenues projections from the Congressional Budget Office (CBO).  

As the graph shows, CBO projections pretend that revenues from the existing individual income tax will somehow rise as a share of GDP every year –forever– reaching levels never before seen in U.S. history, even in World War II. 

Real wages in the CBO forecast supposedly rise so rapidly that more and more middle-income taxpayers are pushed into higher and higher tax brackets.  Since tax reform eliminates the highest tax brackets, it thwarts these sneaky tax increases and thus appears to “lose money.” But the CBO’s phantom projections are sheer fantasy and no basis for rejecting sensible tax reforms to encourage more business investment and greater labor force participation.

 

The Six Most Important Takeaways from CBO’s New Long-Run Fiscal Forecast

The Congressional Budget Office has just released the 2016 version of its Long-Term Budget Outlook.

It’s filled with all sorts of interesting data if you’re a budget wonk (and a bit of sloppy analysis if you’re an economist).

If you’re a normal person and don’t want to wade through 118 pages, you’ll be happy to know I’ve taken on that task.

And I’ve grabbed the six most important images from the report.

First, and most important, we have a very important admission from CBO that the long-run issue of ever-rising red ink is completely the result of spending growing too fast. I’ve helpfully underlined that portion of Figure 1-2.

And if you want to know the underlying details, here’s Figure 1-4 from the report.

Once again, I’ve highlighted the most important portions. On the left side of Figure 1-4, you’ll see that the health entitlements are the main problem, growing so fast that they outpace even the rapid growth of income taxation. And on the right side, you’ll see confirmation that our fiscal challenge is the growing burden of federal spending, exacerbated by a rising tax burden.

And if you want more detail on health spending, Figure 3-3 confirms what every sensible person suspected, which is that Obamacare did not flatten the cost curve of health spending.

Medicare, Medicaid, Obamacare, and other government health entitlements are projected to consume ever-larger chunks of economic output.

Now let’s turn to the revenue side of the budget.

Figure 5-1 is important because it shows that the tax burden will automatically climb, even without any of the class-warfare tax hikes advocated by Hillary Clinton.

And what this also means is that more than 100 percent of our long-run fiscal challenge is caused by excessive government spending (and the Obama White House also has confessed this is true).

Let’s close with two additional charts.

We’ll start with Figure 8-1, which shows that things are getting worse rather than better. This year’s forecast shows a big jump in long-run red ink.

There are several reasons for this deterioration, including sub-par economic performance, failure to comply with spending caps, and adoption of new fiscal burdens.

The bottom line is that we’re becoming more like Greece at a faster pace.

Last but not least, here’s a chart that underscores why our healthcare system is such a mess.

Figure 3-1 shows that consumers directly finance only 11 percent of their health care, which is rather compelling evidence that we have a massive government-created third-party payer problem in that sector of our economy.

Yes, this is primarily a healthcare issue, especially if you look at the economic consequences, but it’s also a fiscal issue since nearly half of all health spending is by the government.

P.S. If these charts aren’t sufficiently depressing, just imagine what they will look like in four years.

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