The 2020 Long-Term Budget Outlook
The agency also incorporates the economic effects of higher marginal tax rates in its extended baseline projections. Under current law, marginal tax rates on individual income are scheduled to rise at the end of 2025. Moreover, as more income is pushed into higher tax brackets over time, labor and capital income face higher effective tax rates.20 Higher marginal tax rates on labor income would reduce people’s after-tax wages and thus lessen their incentive to work. Similarly, an increase in the marginal tax rate on capital income would reduce people’s incentives to save and invest, resulting in a lower stock of productive capital, which reduces labor productivity and puts downward pressure on wages. All told, less private investment and a smaller labor supply would decrease economic output and income.
Projected Spending Through 2050
Spending by the government is projected to represent a larger percentage of GDP in coming years than it has, on average, over the past 50 years. Moreover, CBO projects that growth in spending for Social Security, the major health care programs, and interest would reshape the spending patterns of the U.S. government by 2050 (see Figure 8[16]). Net spending for interest would account for a much greater portion of total federal spending in 2050 than it did in 2019, and spending on Social Security and the major health care programs would account for a much larger share of all federal noninterest spending. Discretionary spending, however, would account for a smaller share of all federal noninterest spending in 2050 than it did in 2019.
Figure 8.
Composition of Federal Outlays
Percent
Source: Congressional Budget Office.
a. Consists of all federal spending other than that for Social Security, the major health care programs, and net interest.
b. Consists of spending for Medicare (net of premiums and other offsetting receipts), Medicaid, and the Children’s Health Insurance Program, as well as outlays to subsidize health insurance purchased through the marketplaces established under the Affordable Care Act and related spending.
Excluding net spending on interest, federal outlays averaged about 18 percent of GDP from 1970 to 2019. Under current law, noninterest outlays are projected to reach 30.4 percent of GDP in 2020 (because of increased spending in response to the pandemic and decreased nominal GDP from the previous year), up from 19.2 percent in 2019. In CBO’s baseline projections, noninterest spending starts to decline as a share of GDP in 2021, as the effects of legislation related to the pandemic wane, and reaches 20.9 percent in 2030.