Archive for Budget
Does the President’s Budget Raise Taxes or Cut Them?
Posted by: | CommentsHere’s a quick multiple choice quiz about President Obama’s new budget.
Over the next ten years, would the budget:
a. Increase taxes by $819 billion
b. Cut taxes by $2 trillion
c. Increase taxes by $1.6 trillion
d. All of the above.
If you answered (d), you have a fine future as a budget watcher.
As noted expert Johnny Depp demonstrated some months ago, it all depends on how you measure things.
For starters, you might compare ten-year tax revenues under the President’s proposal ($38.747 trillion) to what they would be if there were no new policy actions ($37.928 trillion under the President’s notion of “baseline” policy). That gives you answer (a), a tax increase of $819 billion.
But wait. The President’s baseline assumes that many expiring tax provisions get extended. They include the “middle-income” tax cuts originally passed in 2001 and 2003 and now scheduled to expire after 2012, the “patch” of the alternative minimum tax through 2011, and 2009-style estate tax law through 2012. If you treat extending those provisions as a policy choice—a defensible view since it will take new legislation for them to happen— you should score them not as freebies, but as a $2.845 trillion tax cut. Offset that by the President’s $819 billion in tax increases and you get answer (b): the budget calls for roughly a $2 trillion tax cut.
But wait again. Congress and the President recently had a chance to let the “high-income” tax cuts expire. And they didn’t. And they enacted a new estate tax law for 2011 and 2012 that’s lower than 2009 levels. Those are now (temporarily) the law of the land. So you might view them as being current policy. And relative to that policy, the President’s baseline represents an $807 billion tax increase. Add in the other $819 billion and you get answer (c), a tax increase of about $1.6 trillion.
The President’s budget would thus cut taxes by $2 trillion relative to current law, but raise taxes by $1.6 trillion relative to current policy. Or something in between if, like the President, you prefer to use a baseline that’s a mix of current law and current policy.
Does your head hurt yet?
If not, please move on to our extra credit short essay question. How can we square any of these figures with the Administration’s talking point that the budget reduces future deficits by $1.1 trillion with about two-thirds of that coming from spending cuts?
Think about that for a moment. On its face, that would seem to imply that one-third of the deficit reduction comes from revenue increases. And that would put the revenue increase somewhere in the neighborhood of $350-400 billion.
Which bears no resemblance to any of our earlier figures.
I am not sure of the exact calculation behind the talking point (anyone?), but it appears that the main issue is that the administration identifies only some tax increases as being related to deficit reduction. For example, the budget includes an additional $328 billion in revenue to finance new transportation projects. Those revenues are not counted as reducing the deficit. And the budget includes another $56 billion in higher revenues from “program integrity” efforts – i.e., administrative actions to improve enforcement of the tax code. As best I can tell, that revenue, too, is not counted as part of deficit reduction (perhaps because budget experts are hesitant about giving credit for purely administrative changes).
With those two adjustments, it appears that the deficit-reducing revenue increases, as the Administration measures them, total about $425 billion over the next ten years. Which is still more than a third of the $1.1 trillion in deficit reduction. But maybe we are close enough for partial credit.
Update 2/17: Turns out the administration’s figure for deficit-reducing tax provisions is $375 billion. How do you get there? Three steps: The President’s budget would raise revenues by $819 billion. However, it would also increase outlays (due to refundable tax credits) by $115 billion. So the net budget impact of provisions that affect revenue is $703 billion. Subtract the $328 billion in unspecified funding for surface transportation, and you have $375 billion (which does include the program integrity efforts). As this shows, a recurring nu(is)ance in budget accounting is that tax provisions often have spending impacts. (Not to mention all the tax preferences that are hidden spending.)
Obama’s Sideshow Budget Will Yield Little Real Fiscal Progress
Posted by: | CommentsThe Obama budget confirms what we already knew—neither tax reform nor significant increases in revenues are on the table. Neither are major entitlement programs such as Medicare and Social Security. The coming budget debate will be fought over a small sliver of spending. This is ground where Republicans feel quite comfortable and Democrats do not.
But as this chart shows, spending is in fact only half of the story. And the spending that both President Obama and the congressional GOP want to target is not only a tiny share of federal outlays, it has been growing more slowly than programs such as Medicare, Medicaid and Social Security, which appear to be exempt from budget cutting.
Mostly due to one-off responses to the Great Recession, such as TARP and the stimulus, all spending as a share of Gross Domestic Product ballooned in 2009-10. While spending will slowly fall over the next couple of years—thanks to an improving economy, the merciful end to various government bailouts, and President Obama’s proposed spending freeze for some domestic programs, overall outlays would settle in at about 23 percent of GDP through the end of the decade according to Obama’s fiscal plan.
That’s too high, especially since most costs of the aging Baby Boomers won’t have kicked in yet. But having a bloody battle over 12 percent of spending is something like the management of a bankrupt company using all of its energy to cut the travel budget, instead of trying to figure out why customers stopped buying its products.
Despite wild claims from some on the political right, taxes as a share of the economy in the first two years of the Obama Administration have hovered at less than 15 percent of GDP. That’s their lowest level since the early 1950s. Taxes in fact are far lower today than during Ronald Reagan’s presidency. You could look it up (or look at the chart)
Some of this was due to the rotten economy. But some has been thanks to tax policy over the past couple of years. Not only did Obama extend the Bush-era tax cuts through next year, but he’s convinced Congress to enact some targeted reductions of his own. Among them: a more generous Child Credit, a more expansive Earned Income Credit, a Making Work Pay Credit, generous tax breaks for companies that buy new equipment this year, and the payroll tax holiday enacted last December (which replaced the work credit).
In today’s budget proposal, Obama would increase taxes to 17.9 of GDP in 2013. This is just about what revenues averaged under Reagan. And it would be a step in the right direction. Except the chances of it happening hover around zero.
Obama would get there mostly with a collection of ideas that he failed to sell to even a Democrat Congress. They include: allowing the 2001 and 2003 tax cuts to expire at the end of 2012, capping the value of itemized deductions at 28 percent, taxing the compensation of hedge fund managers and other financiers at ordinary income instead of capital gains rates, and increasing taxes on multinationals.
These proposals will make lobbyists happy and even richer than they are. But there is no chance that tea-party obsessed congressional Republicans would support any of them. Thus, even with an improving economy, tax revenues are likely to remain a relatively small share of the overall economy through Obama’s first term.
The upcoming debate over that small chunk of non-defense domestic spending that is subject to annual congressional review is healthy and important—and it will get very nasty. But compared to burgeoning entitlements on one hand and tax revenues that remain near historic lows on the other, the fight over 12 percent of the budget is a fiscal sideshow.
Seven Ideas to Guide Tax Reform
Posted by: | CommentsThis morning I appeared at a Senate Budget Committee hearing, “Tax Reform: A Necessary Component for Restoring Fiscal Sustainability.” My full testimony, “Cutting Tax Preferences Is Key to Tax Reform and Deficit Reduction,” is available here.
Here’s my opening statement:
America’s tax system is broken. It’s needlessly complex, economically harmful, and often unfair. It fails at its most basic task, raising enough money to pay our government’s bills. And it’s increasingly unpredictable, with large, temporary tax cuts not only in the individual income tax, but also in corporate, payroll, and estate taxes.
For all those reasons, our tax system cries out for reform. Such reform could follow many paths. Some analysts recommend the introduction of new taxes—such as a value-added tax, national retail sales tax, or pollution taxes—to supplement or replace our current system. Those ideas are worth serious discussion, but in today’s testimony I would like to focus on a more traditional approach to reform: redesigning our income tax.
I would like to make seven main points:
1. Tax preferences pervade the tax code. These preferences total more than $1 trillion annually, almost as much as what we collected from individual and corporate income taxes combined. These preferences narrow the tax base, reduce revenues, distort economic activity, complicate the tax system, force tax rates higher than they would otherwise be, and are often unfair.
2. The first step in any income tax reform should be to broaden the tax base by reducing or eliminating tax preferences. Doing so would help level the playing field among different economic activities, reduce the degree to which taxes distort economic behavior, and make taxes simpler to file and administer.
3. Policymakers can use the resulting revenue – potentially hundreds of billions of dollars each year – to lower tax rates, reduce future deficits, or both. Lowering tax rates would further reduce the economic distortions created by the tax system and would encourage economic growth. Reducing future deficits would help tame our federal debt, which threatens to grow to unsustainable levels in coming years and thus poses a significant risk to our economy.
4. Many tax preferences are effectively spending programs run through the tax code; that poses a challenge for how we talk about tax reform and the size of government. Any cuts to these spending-like preferences will increase federal revenues, but will reduce government’s influence over economic activity. Advocates of smaller government are often skeptical of proposals that would increase federal revenues. When it comes to paring back spending-like tax preferences, however, an increase in revenues may actually mean that government’s role in getting smaller.
5. Other tax preferences, however, are not spending programs in disguise. More and more observers have embraced the idea that tax preferences resemble spending through the tax code. That’s a promising development. Unfortunately, that enthusiasm has sometimes led to the misconception that all items identified as tax preferences are akin to spending. That’s understandable given that these items are often called “tax expenditures.” But it is not correct. Preferential tax rates on long-term capital gains and qualified dividends, for example, are (imperfect) efforts to limit the double taxation that can occur when investment income is subject to both personal and corporate taxes. Such provisions should be viewed and evaluated as tax measures, not as hidden spending programs.
6. Many tax preferences provide benefits to millions of taxpayers; they aren’t just “tax breaks for special interests.” For example, the three largest tax preferences are the exclusion for employer-provided health insurance, preferences for retirement saving, and the mortgage interest deduction. Americans should understand that to get the benefits of tax reform – lower rates, simpler taxes, and a more vibrant economy – they will need to give up some popular tax breaks.
7. Policymakers should re-evaluate the design of any tax preferences that they decide to keep. Some preferences are needlessly complex and could be simplified; that’s true, for example, of the preferences aimed at low-income workers and families. Other preferences might operate more efficiently as credits rather than as deductions or exclusions. Credits can provide more uniform incentives to particular activities – e.g., homeownership – than deductions or exclusions whose value depends on whether a taxpayer itemizes and what tax bracket they are in.
Bottom line: By reducing, eliminating, or redesigning many tax preferences, policymakers can:
- Make the tax system simpler, fairer, and more conducive to America’s future prosperity;
- Raise revenues to finance both across-the-board tax cuts and much-needed deficit reduction; and
- Improve the efficiency and fairness of any remaining preferences.
P.S. The other witnesses included two other Tax Policy Center folks – former director Rosanne Altshuler and co-founder Gene Steuerle — and Larry Lindsey. All our testimonies are available here.