Reassessing the Fiscal Gap: Why Tax-Deferred Saving Will Not Solve the Problem

Alan J. Auerbach,
Alan Auerbach Headshot
Alan J. Auerbach Robert D. Burch Professor of Economics and Law - Economics Department, UC-Berkeley, Director - Robert D. Burch Center for Tax Policy and Public Finance
Peter R. Orszag, and
Peter R. Orszag Vice Chairman of Investment Banking, Managing Director, and Global Co-Head of Healthcare - Lazard
William G. Gale
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

July 28, 2003

It is by now conventional wisdom that the United States faces a sizable long-term fiscal
gap. Under a wide range of scenarios, the projected costs of current spending programs
substantially exceed projected tax revenues. The fiscal gap has important implications for
future generations and should inform current policy choices. For example, many observers
believe that the size of the fiscal gap implies that the tax cuts enacted over the past few years
have taken the country in the wrong fiscal direction.

Boskin (2003) suggests the conventional wisdom regarding the long-term fiscal gap is
incorrect. He claims that estimates of the long-term fiscal status largely or entirely omit revenue
from tax-deferred saving plans, and that the omissions are almost as large as the projected budget
shortfalls over analogous time periods. Specifically, he calculates that existing and projected
tax-deferred saving will generate net revenue with a present value of $12 trillion through 2040
and $17 trillion through 2050. He concludes that “The total size may well rival the 75-year
actuarial deficits in Social Security and Medicare HI, plus the national debt. An analysis of the
underestimation of—more accurately, failure to consider—the long-run budgetary impacts of
deferred taxes suggests that they will offset a sizeable share of the projected budget deficit
through mid-century.”

Boskin’s results have understandably generated substantial attention. The implications,
however, have been widely misinterpreted. This paper reassesses the long-term fiscal outlook in
light of Boskin?s findings.