Federal Budget Deficit: Federal Debt & Taxes

The federal government is on track to run a $1.4 trillion deficit in fiscal year 2023, according to new projections from the Congressional Budget Office (CBO). Across the next decade (2024 through 2033), deficits will total more than $20 trillion, reaching an annual budget deficit of nearly $2.9 trillion in 2033. Completely balancing the budget over the next decade would be a tall order; instead, lawmakers should stabilize the fiscal situation while maintaining a competitive, pro-growth tax code and avoiding budget gimmicks.

The ongoing deficits are the result of a mismatch between government spending and tax revenue, depicted in the table below. While revenue and spending as a share of GDP will meet or exceed their historical averages, spending growth outpaces revenue growth, leading to persistent deficits. Growing costs for interest, health-care programs, and Social Security drive the relative rise in spending.

In 2023, revenues will equal 18.3 percent of GDP, compared to a 50-year average of 17.4 percent, while spending will equal 23.7 percent of GDP, compared to a 50-year average of 20.1 percent. Interest costs will grow from 2.4 percent of GDP in 2023 to 3.6 percent of GDP over the next decade. Debt held by the public will reach its highest level ever recorded by 2033—118 percent.

CBO Projects Worsening Fiscal Picture for United States
  2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 10-Year Total
Revenue (Billions) $4,838 $4,966 $5,310 $5,655 $5,916 $6,139 $6,364 $6,603 $6,838 $7,098 $59,727
Revenue (Share of GDP) 17.7% 17.4% 17.7% 18.1% 18.2% 18.2% 18.1% 18.1% 18.1% 18.1% 18.0%
Spending (Billions) $6,493 $6,719 $7,026 $7,361 $7,731 $8,100 $8,479 $8,894 $9,317 $9,799 $79,920
Spending (Share of GDP) 23.8% 23.5% 23.5% 23.6% 23.8% 24.0% 24.1% 24.4% 24.6% 24.9% 24.1%
Deficit (Billions) -$1,655 -$1,752 -$1,716 -$1,706 -$1,815 -$1,961 -$2,115 -$2,291 -$2,480 -$2,702 -$20,193
Deficit (Share of GDP) -6.1% -6.1% -5.7% -5.5% -5.6% -5.8% -6.0% -6.3% -6.5% -6.9% -6.1%

Source: Congressional Budget Office, The Budget and Economic Outlook: 2023 to 2033, Table 1-1, Adjusted.

The Congressional Budget Office (CBO) baseline assumes upcoming changes to tax and spending laws will occur as scheduled, including the expiration of nearly every aspect of the Tax Cuts and Jobs Act (TCJA) individual income tax changes. The TCJA expirations explain much of the anticipated jump in revenue from 2025 and 2027, boosting individual income tax receipts by 0.8 percentage points as a share of GDP from 2025 to 2033. The expirations would also create a drag on economic growth. If, instead, lawmakers extend the TCJA individual income tax provisions, it would boost economic growth but further increase the deficit.  

House Republicans have expressed the desire to balance the federal budget over the next decade. The Committee for a Responsible Federal Budget (CRFB) estimates doing so without tax increases would require an approximate 25 percent reduction in all government spending. Excluding certain programs, such as Social Security, Medicare, defense, and veterans, lifts the required cuts to 85 percent.

Similarly, closing the next decade’s budgetary gap without spending cuts would entail eye-popping tax increases with steep economic costs. Consider the following examples, modeled with the Tax Foundation’s Taxes and Growth model. Note the options are modeled under the previous baseline, running from 2023 through 2032, over which deficits will total $18.9 billion.

  • Raising individual income tax rates by 50 percent across the board would increase revenue by $13.3 trillion from 2023 through 2032 on a conventional basis. From 2023 to 2025, the rates would range from 15 percent to 55.5 percent. From 2026 on, the rates would range from 15 percent to 59.4 percent. On a dynamic basis, it would raise about $9 trillion, as higher marginal tax rates on labor and capital discourage economic activity. Accordingly, long-run living standards would fall by 4.9 percent, measured by GDP.
  • Raising the corporate income tax rate to 35 percent, the rate that prevailed prior to the TCJA reforms, would increase revenue by $2.6 trillion from 2023 through 2032 on a conventional basis. On a dynamic basis, it would raise $2.1 trillion, as the higher marginal tax rate on capital discourages investment. Accordingly, long-run living standards would fall by 1.5 percent, measured by GDP.

Even combined, the two examples would raise $15.8 trillion on a conventional basis, falling short of entirely closing the gap and coming at the expense of a 6.3 percent drop in long-run GDP. Accordingly, the combined revenue raised totals $10.9 billion on a dynamic basis.

Adding base broadeners could raise additional revenue. For instance, combining the two tax increases with the elimination of the itemized deductions for mortgage interest and state and local taxes paid would raise $18.1 trillion from 2023 to 2032 on a conventional basis. In the long run, GDP would fall by 7.8 percent, and the combination would raise a smaller $11.9 billion on a dynamic basis.

Hiking marginal tax rates on labor and capital income cannot be reasonably relied upon to close the budget gap—and attempting to do so would jeopardize economic growth. Likewise, targeting tax increases at wealthy households, as President Biden’s proposed “billionaire minimum tax” does, would raise little revenue compared to significant administrative and economic trade-offs.

The CBO report warns the coming decade will be one fraught with budget challenges, including rising deficits, growing interest costs, and expiring tax provisions. Immediately balancing the $20 trillion budget shortfall would take drastic, unwanted policy changes. It’s an unrealistic goal. Instead, lawmakers should target a more achievable goal, such as stabilizing debt and deficits with an eye toward comprehensive tax reform that can produce sufficient revenue with minimal economic harm.

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