Math should be straightforward, but answering a math problem such as calculating the size of a tax cut or tax increase becomes difficult when politicians and political observers can’t agree on how to define terms like “tax increase” or “tax cut.” That fundamental disagreement is fueling an argument over whether the President’s deficit reduction plan would increase or decrease taxes and whether it would raise or reduce the federal deficit.
The problem is that people disagree on the base that you’re measuring the change against. Should we measure against what the tax code will be in the base year if it stays the same, or the anticipated tax level in that year resulting from statutory changes that have already been enacted? To get less hypothetical, let’s suppose Congress were to decide to extend some, but not all, of the Bush-era tax cuts that are scheduled to expire at end of 2012? Would that be a tax increase or a tax cut? Would it add to the deficit (since some of the expiring tax breaks are being continued), or does it reduce the deficit (if some of current tax breaks are being ended)?
These are more than semantic questions; they are also high-stakes political questions. Although I figured the matter of how to define the effects of tax policy decisions on the federal deficit would have been settled in the federal debt ceiling bill enacted during the summer, I was wrong. The interim compromise that was approved (which gives a “supercommittee” the job of recommending how to reduce the deficit by an additional $1.5 trillion over 10 years) does not clearly resolve the issue of how to define the base against which Congress or the President should measure the deficit reduction.
One facet of the ongoing debate over this issue is highlighted by a piece written by Citizens for Tax Justice (CTJ), which makes the case that the deficit reduction plan proposed by President Obama early last week is a “massive tax cut.” Quoting from the CTJ statement:
“The tables in the back of the President’s 80-page plan quietly remind us that the total cost of making permanent the Bush tax cuts would be $3.867 trillion over the next ten years, but the President says he will “raise revenue” by making permanent “only” $3.001 trillion of these tax cuts. We certainly applaud the President for refusing to extend the $866 billion of these tax cuts that would go exclusively to those with adjusted gross incomes in excess of $250,000, but it’s difficult to call this deficit reduction.”The CTJ arguments are consistent with the practice of the Congressional Budget Office, which uses a so-called “current-law” baseline -- which essentially assumes that Congress won’t make any changes in current laws governing entitlement programs and taxes (including laws ending tax breaks). The CTJ analysis goes on to explain that other tax changes in the President’s plan would raise $259 billion over the next 10 years, which still leaves a net tax cut of more than $2.7 trillion (on top of which there will be significant additional borrowing costs that will result).
Ironically, fiscal conservatives and liberals sometimes shift back and forth in their arguments about what to use for the baseline. For example, Speaker Boehner has contended at times that the current law baseline is correct, which could be interpreted to mean that any of the Bush cuts that are extended increase the deficit and therefore, he argues, need to be offset by larger spending cuts. However, conservatives often take the opposite position, so they can make the case that the President’s proposal amounts to a tax increase of more than a trillion dollars, rather than the $2.7 trillion tax cut that CTJ calculates.
In upcoming blog posts we’ll look at some of the other aspects of the President’s deficit reduction plan, including the issue of whether it’s “class warfare.”