Receipts are projected to increase by 67% from 1977 to 1981 due to growth in tax bases and an increase in the average effective tax rate on personal income as rising real incomes and inflation move people into higher tax brackets. This increase in effective tax rates, which is implicit in a progressive income tax system, accounts for about $50 billion of the total increase in individual income tax receipts between 1977 and 1981. Over the past two decades, legislated tax cuts have offset implicit increases of this nature. Without these reductions, total Federal receipts would have risen to a much larger percentage of GNP than they now claim. Tax proposals included in this budget reduce individual and corporation income taxes by $28 billion in 1977 and $55 billion by 1981. The largest reductions result from: -tax reductions to take effect July 1, 1976, when temporary tax cuts expire; these changes reduce income taxes by $28 billion in 1977, and $39 billion by 1981; and -integration of individual and corporation income taxation; this proposal does not affect receipts in 1977, but reduces receipts by $13 billion by 1981. For a more detailed discussion of these and other tax proposals, see Part 4. Social insurance taxes and contributions, which have increased from only 12% of receipts in 1955 to almost 31% two decades later, are projected to increase by 61% between 1977 and 1981. Under current law, the social security tax rate is scheduled to increase from the current rate of 11.7% to 12.1% on January 1, 1978, and to 12.6% on January 1, 1981. As part of the program to restore the fiscal integrity of the Social Security trust fund, the President is proposing an additional 0.6 percentage points, effective January 1, 1977, to place the social security system on a sounder financial basis. In addition to these rate increases, the taxable earnings base is projected to increase, automatically under current law, from its current level of $15,300 to $23,400 by January 1981. Legislation is also proposed to increase the rate and base on which unemployment insurance taxes are collected. The combined effect of these proposed rate and base increases is to raise receipts by over $5 billion in 1977 and by $11 billion by 1981. Estate and gift taxes, customs, excise taxes, and miscellaneous receipts are projected at $45 billion in 1981, an increase of $10 billion from 1977. These estimates assume continuation of the 4¢ per gallon Federal excise tax on gasoline and other highway trust fund taxes, all of which are scheduled to decline or expire on September 30, 1977. Full-employment receipts is an analytical concept based on the amount of income that would be generated if the economy were continually operating at full capacity (conventionally defined as a 4.0% unemployment rate for the civilian labor force). Similarly, fullemployment outlays include only that portion of the outlays for benefits under the regular unemployment insurance program that would be paid if the economy were continuously operating at full capacity. They thus eliminate the fluctuations in actual outlays for these benefits due to year-to-year changes in the unemployment rate. The differences between these adjusted receipts and outlay estimates are called full-employment budget margins. Changes in these margins from one year to the next provide a rough measure of the impact of discretionary fiscal policy (i.e., excluding automatic stabilizers) on the economy. Full-employment outlays are estimated at $386 billion in 1977, rising to $508 billion in 1981. Full-employment receipts are projected to increase from $389 billion in 1977 to $607 billion in 1981. The full-employment margin gradually increases from $3 billion in 1977 to $99 billion in 1981. While the full employment concept is traditionally defined in terms of a hypothetical 4.0% unemployment rate, any other rate would serve essentially the same analytic purpose, provided it remained fixed from year to year. Budget trends. The major trend in the composition of the budget outlays over the last 20 years has been the rapid growth of domestic assistance programs and the corresponding relative decline in spending for direct Federal operations, particularly defense. Over the past two decades, outlays for domestic assistance have been growing much more rapidly than national output, and more rapidly than total Federal outlays. Direct Federal operations include Federal purchases of goods and services for use in Government programs such as defense and space exploration, compensation of Federal employees, payment of interest on the public debt, and energy research and development. Domestic assistance programs, in contrast, include payments to retired, disabled, or unemployed workers, to lower-income families and individuals, and aid to State and local governments. Domestic assistance. Indirect (grants-in-aid). Total outlays.. (17.0) (21.8) (22.1) (22.1) (30.2) (40.0) (40.6) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1 Excludes military retired pay and grants classified in the national defense function. The detailed composition of the 5-year projections of outlays and budget authority is shown on pages 35-37 by major function and agency. While total outlays increase by 29% from 1977 to 1981, outlays for health, income security, natural resources, environment and energy, and national defense increase faster than total outlays. The five-year Defense projection is calculated on the basis of a continuation of existing force and readiness levels. The Administration will continue to review the adequacy of our force posture, including surface naval capabilities in the year ahead. Projected outlays for other functions, such as interest and general government decline in relative terms but not absolutely. Outlays for education, training, and social services are projected to decline, both in absolute and relative terms in large part due to the anticipated fall in unemployment, and hence, to decreases in various employment and training assistance programs. However, these trends are influenced by the guidelines used in developing long-range projections. For example, functions such as income security that consist largely of programs indexed to the cost of living reflect assumptions about anticipated inflation. Functions that consist largely of programs without such mandatory adjustments appear to grow more slowly. Moreover, the national defense function includes allowances for pay increases and for increases in the prices of purchases of goods and services. For the other functions these allowances are not shown on a functionby-function basis, but rather as a single entry. Thus, while the functional trends may in some cases reflect the future implications of current law and budget proposals, they are not predictions of the The recent large increases and additions to domestic assistance programs have, to some extent been offset by real reductions in direct Federal operations, particularly defense. Thus, the rise in outlays for health and for income security-to 45% of total outlays by 1981, compared to 33% in 1971-indicates an increased response to human needs, but also a long-range budgetary problem of fundamental importance if these programs were to grow in the future at the same rate as they have in the past. The budget cannot accommodate the same rates of growth in the future, and maintain or increase defense and other direct Federal activities unless the Federal Government assumes an ever-increasing portion of GNP through increased taxes. Controllability.-Outlays in any one year are considered to be relatively uncontrollable by the President when his decisions can neither increase nor decrease them without changes in existing statutes. Relatively uncontrollable outlays consist of two major categories: open-ended programs and fixed costs, and payments out of prior-year contracts and obligations. The percentage of open-ended programs and fixed costs under current law is projected to reach 62% by 1981. As recently as 1971 open-ended programs and fixed costs amounted to less than 47% of the budget. The substantial growth since then has been due primarily to the rapid increase in benefit payments for individuals. |