CONGRESSIONALBUDGETOFFICEPhillipL.Swagel,Director

U.S.Congress

Washington,DC20515

April10,2025

HonorableJeffMerkleyRankingMember

CommitteeontheBudgetUnitedStatesSenate

Washington,DC20510

Re:ProjectionsofDeficitsandDebtUnderanAlternativeScenariofortheBudget

DearSenator:

Thisletterrespondstoyourrequestforananalysisofprojecteddeficitsanddebtunderanalternativescenarioforthebudgetthatreflectstwochanges

totheCongressionalBudgetOffice’sbaseline.Specifically,youaskedhowCBO’sprojectionsofdeficitsanddebtwouldchangeifcertainprovisions

ofthe2017taxact(PublicLaw115-97)wereextendedpermanently.

1

(Bystatute,estimatesoftheeffectsoftaxlegislationaremadebythestaffoftheJointCommitteeonTaxation,orJCT.)Youalsoaskedhowthose

projectionswouldchangeifrevenueswerereducedbyanadditional

$150billionineachyearofthe10-yearbudgetwindowandbyafixedpercentageofgrossdomesticproduct(GDP)thereafter.

InCBO’smostrecentextendedbaselineprojections,whichreflectthe

assumptionthatcurrentlawsgenerallyremainunchanged,primarydeficits(thatis,deficitsexcludingnetoutlaysforinterest)average2.0percentofGDPoverthe2025–2055periodandequal1.9percentofGDPin2055.

2

1Fordetailsofthoseprovisionsandestimatesoftheeffectsofextendingthem,seeThomasA.Barthold,ChiefofStaff,JointCommitteeonTaxation,lettertotheHonorableSheldon

Whitehouse,theHonorableRonWyden,theHonorableRichardE.Neal,andtheHonorableBrendanF.Boyle(April3,2025),

/32y3z95v.

2Inaccordancewithstatutoryrequirements,CBO’sprojectionsreflecttheassumptionsthat

currentlawsgenerallyremainunchanged,thatsomemandatoryprogramsareextendedaftertheirauthorizationslapse,andthatspendingonMedicareandSocialSecuritycontinuesasscheduledeveniftheprograms’trustfundsareexhausted.

HonorableJeffMerkleyPage2

Totaldeficitsaverage6.3percentofGDPoverthatperiodandreach

7.3percentofGDPin2055.Federaldebtheldbythepublicincreasesfrom

100percentofGDPto156percentofGDP—exceedinganypreviouslyrecordedlevelandontracktoincreasefurther.

3

CBOestimatesthatifprovisionsofthe2017taxactwereextended,tax

revenueswerelowerbytheadditionalamountyouspecified,andthere

werenootherchangestofiscalpolicy,debtheldbythepublicwouldreach220percentofGDPin2055,63percentagepointshigherthaninthelong-termbaselineprojections.Interestrateswouldalsobehigher,andrealgrossnationalproduct(GNP)perperson—ameasureoftheresourcesavailabletoU.S.households—wouldbelowerinthatyear.

4

Thoseestimatesincorporatetheeconomiceffectsthatwouldresultfromtheextensionofprovisionsofthe2017taxactandtheadditionalreductionsinrevenuesthatyouspecified.Thoseeffectsincludeincreasesinthesupplyoflaborandinvestmentbroughtaboutbylowermarginaltaxratesonincomefromlaborandcapital,increasesinoutputintheshorttermcausedby

greateroveralldemandforgoodsandservices,anddecreasesinoutputinthelongertermcausedbylargerfederaldeficitsanddebt.

AScenarioWithProvisionsofthe2017TaxActExtendedandAdditionalReductionsinRevenues

YouaskedCBOtoanalyzetheeffectsofanalternativebudgetscenarioinwhichcertainprovisionsofthe2017taxactthatchangedtheindividual

incometaxcontinueindefinitely:thelowerstatutorytaxrates,thechangestoallowabledeductions,thelargerchildtaxcredit,the20percentdeductionforcertainbusinessincome,andtheincomelevelsatwhichthealternativeminimumtaxtakeseffect.CBO’sanalysisalsoaccountedfortheeffectsofpermanentlyextendingthehigherestateandgifttaxexemptions,

3CongressionalBudgetOffice,TheLong-TermBudgetOutlook:2025to2055(March2025),

/publication/61187.

CBO’slong-termbudgetprojections,referredtoastheextendedbaseline,arebasedonthedemographic,economic,and10-yearbudgetprojectionsthatCBO

publishedinJanuary2025.Thedemographicprojectionsreflectinformation,laws,andpoliciesasofNovember15,2024.Theeconomicprojectionsreflectthosedemographicprojectionsaswellaslaws,policies,economicdevelopments,andpreliminarybudgetprojectionsasofDecember4,

2024.The10-yearbudgetprojections,whichbuildonthosedemographicandeconomic

projections,includetheeffectsoflegislationenactedasofJanuary6,2025.Theprojectionsdonotreflecttheeffectsofadministrativeactionstakenorjudicialdecisionsmadeafterthoserespectivedates,includingactionsanddecisionsaffectingimmigration,tariffs,andotherpolicyareas.

4UnlikeGDP,GNPincludesincomethatU.S.residentsearnabroadandexcludesincomethatforeignersearnfromdomesticsources.

HonorableJeffMerkleyPage3

permanentlyextendingprovisionsthatallowbusinessestoimmediately

deductthefullcostofcertaininvestments,andmaintainingmoregenerousrulesforseveralbusinesstaxprovisions.Manyotherprovisionsofthe2017taxactarepermanentandarethereforereflectedinCBO’sbaseline

projectionsaswellasinthatalternativescenario.

Youalsoaskedthatrevenuesinthealternativescenariobereducedbyan

additional$150billionineachyearofthe10-yearbudgetwindowandbyafixedpercentageofGDPthereafter.Reductionsinrevenuescanoccur

throughmanychannels.Tosimplifytheanalysis,youaskedCBOto

assumethatthereductionsoccurthroughauniformrefundabletaxcreditthatleavesincentivestoworkandinvestunchanged.

5

Inthatscenario,deficitsanddebtarelargerthantheyareinCBO’sextendedbaseline(see

Figure1)

:

?Primarydeficitsoverthefirstdecadeoftheprojectionperiod(fiscalyears2026to2035)areabout$6trillionlarger.By2055,the

primarydeficitequals3.8percentofGDP,1.9percentagepointshigherthaninCBO’sextendedbaseline.

?Thetotaldeficitin2055equals12.0percentofGDP,4.7percentagepointshigherthaninCBO’sextendedbaseline.

?Debtheldbythepublicin2055equals220percentofGDP,63percentagepointshigherthaninCBO’sextendedbaseline.

?Theaverageinterestrateonfederaldebtin2055equals4.0percent,0.3percentagepointshigherthaninCBO’sextendedbaseline.

?RealGNPperpersonis3.3percentlowerin2055thaninCBO’sextendedbaseline(or$4,375lower,in2025dollars).

Economicgrowthwouldbefasterinthefirstseveralyearsafterthe

extensionofthetaxprovisions,primarilybecauseoftheincreaseinthe

overalldemandforgoodsandservices.Itwouldbeslowerinthelonger

term:Althoughlowermarginaltaxrateswouldraisethesupplyoflaborandinvestmentbyincreasingtheincentivestoworkandinvest,largerdeficits

5Reductionsintaxrevenuesattributabletorefundabletaxcreditsreflecttheportionsofthecreditsthatexceedtaxpayers’liabilityandarerecordedinthebudgetasincreasesinmandatoryspending.

HonorableJeffMerkleyPage4

anddebtwouldreducetheresourcesavailableforprivateinvestment,eventuallyoffsettingthatboosttogrowth.

6

InterestrateswouldbehigherintheshorttermbecausetheFederalReservewouldrespondtoinflationarypressurefromincreaseddemandbyeither

raisinginterestratesorkeepingthemhigherthantheywouldbeotherwise.Inthelongerterm,largerdeficitsandlowerprivateinvestmentwould

reducetheamountofcapitalperworker.Thatwouldboosttheproductivityofcapitalbecauseeachunitwouldbeusedbymoreworkers.Asaresult,

returnsoncapitalwouldrise—alongwithreturnsonotherassetsthatcompeteforinvestors’resources,includingTreasurysecurities.

HowCBOProjectedThoseOutcomes

CBO’slong-termbudgetprojectionsbuildontheagency’sbaseline

projections,whichareconstructedinaccordancewithasetofrules.Mostofthoserulesarestatutory—theyarefoundintheCongressionalBudget

andImpoundmentControlActof1974,theBalancedBudgetand

EmergencyDeficitControlActof1985,theFederalCreditReformActof1990,theBudgetControlActof2011,andotherlaws.

Toreflectthebudgetscenariothatyoudescribed,CBOemployedthe

methodsitusedtoestimatedeficitsanddebtunderseveralalternative

economicandbudgetaryscenariosinapreviousreport.

7

CBOusedJCT’sestimatesofthebudgetaryeffectsofextendingprovisionsofthe2017tax

actthrough2035andprojectedthoseeffectsthrough2055.(Again,by

statute,allestimatesoftheeffectsoftaxlegislationaremadebythestaffofJCT.)CBOthenreducedrevenuesbyanadditional$150billionperyear

for2026through2035andbyabout1.5percentofGDPinallsubsequentyears.

Inthatscenario,taxpolicieswoulddiffersignificantlyfromcurrentlaw.

Thosechangeswouldaffecttheeconomyinwaysthatwouldfeedbackinto

6Formoreinformationabouttheeconomiceffectsofextendingprovisionsofthe2017taxact,seeCongressionalBudgetOffice,“HowtheExpiringIndividualIncomeTaxProvisionsinthe2017

TaxActAffectCBO’sEconomicForecast”(December2024),

/publication/60986,

and“CBO’sModelforEstimatingtheEffectsonNewInvestmentofDeductionstoRecovertheCostofCapital”(December2024),

/publication/60985;

andStaffoftheJoint

CommitteeonTaxation,“OverviewofJCTMethodologyforAnalyzingtheMacroeconomicEffectsofProposedChangesinTaxLaw”(December2024),

/4v26ukjt.

7CongressionalBudgetOffice,TheLong-TermBudgetOutlookUnderAlternativeScenariosfortheEconomyandtheBudget(May2024),

/publication/60169.

HonorableJeffMerkleyPage5

thebudget,furtherchangingspendingandrevenues.Inthesimplified

analysispresentedhere,CBOaccountedforfourofthoseeconomiceffects:

?Effectivemarginaltaxratesonincomefromlaborwouldbelowerthantheyareintheextendedbaseline.Thoselowertaxrateswouldencouragepeopletoworkandsavemoreandwouldthusincreaseoutput.

8

?Effectivemarginaltaxratesonincomefrommosttypesofcapital

wouldalsobelower.Thoselowerrateswouldencouragesavingandinvestment,furtherboostingoutput.

9

?Overalldemandforgoodsandserviceswouldbehigher.Higher

after-taxincomewouldboostconsumerspending,leadingoutputtoincrease.

?Federaldebtwouldbelarger.Theincreaseinfederalborrowingwoulddrawresourcesawayfrominvestmentin