Try a simple exercise. Take President Obama’s revenue proposals at face value and see what they tell us about the fiscal world in 2020.  The bottom line: A major tax cut relative to doing nothing, but nonetheless an increase in tax revenues to something close to historical levels. And continued large and unsustainable deficits.

 

How can we cut taxes and get more revenue? (Hint: It’s not the miracle of supply-side economics.) The answer lies mainly in economic growth and increases in average tax rates in both the regular tax and the Alternative Minimum Tax (AMT).

 

By far the dominant tax proposal of the President is to extend the Bush tax cuts and continue to protect many middle-class taxpayers from the AMT.

 

• By 2020, the budget assumes an annual revenue loss of about $500 billion if we extended all of the Bush tax cuts and indexed the AMT for inflation, but kept some estate tax.     
• The President would then reverse some of that loss by raising taxes, mainly on higher income people, by about $140 billion—largely through restoring their pre-Bush tax rates and capping the value of their itemized deductions. 
• Other “revenue changes and loophole closers” would bring in about $50 billion, including about $10 billion in a bank tax, $12 billion in international tax changes, and slashing tax subsidies for fossil fuel producers.
• Other revenue losers (such as credits for higher education, research and children) would cost about $40 billion.

 

Some highly touted tax cuts are simply aren’t around very long or are quite small by comparison.    For instance, bonus depreciation costs $22 billion in 2010 and $15 billion in 2011, but then raises almost same amount from 2012-2020 since it’s only defers taxes. The making work pay tax credit costs roughly $60 billion, spread over two fiscal years, 2010 and 2011. The allowance for jobs initiatives, split between the revenue side and the spending side, would cost about $75 billion, two-thirds in 2011. Those are significant numbers, but they are long gone by 2020. Doubling of the child and dependent care credit would be permanent, but would only cost around $1 billion in 2020.
 
The net loss in revenues (-$500b + $140b + $50b – $40b) would be about $350 billion relative to doing almost nothing other than retaining some estate tax. The Administration argues that it is increasing taxes by $150 billion relative to what they argue is the current “policy,” including all of the Bush tax cuts.

 

Still, the federal government would collect significantly more revenue as a share of GDP than it does today. The President’s budget counts on fairly big revenue gains from economic growth and recovery—including more capital gains, stock options, bonuses, and other income at the top of the income distribution.  Average tax rates would also increase because of restoration of some Bush tax cuts and because higher real incomes move taxpayers into higher tax rate brackets in the regular income tax and makes more of them subject to the AMT (even if the AMT is adjusted to prevent inflation from doing the same). 

 

Taxes would rise by about 5 percentage points of GDP—from 14.8 percent in 2009 and 2010 to 19.6 percent in 2020 (that is, from well below to above the 18.0 percent average since 1960). That rate increase alone brings in about $1.2 trillion just in the year 2020.

 

At the end of the day, the President still joins Congress in avoiding any legislation that would directly ask the middle class to contribute anything to help address an unsustainable deficit.

Word is getting around that CBO has blessed a major budget reform plan proposed by Representative Paul Ryan (R-WI) as, in the words of National Review Online, “a roadmap to solvency.” It isn’t true.

Even Washington Post blogger Ezra Klein, who normally does a terrific job with this stuff, reports Ryan’s plan “erases the massive long-term deficit.” That’s not true either. All this confusion is due to a letter written on Jan. 27 from CBO director Doug Elmendorf to Ryan. In that 50-page document, CBO suggests the plan could eliminate the deficit in 50 years and, even more impressively, eliminate the debt by 2080.

But, and this caveat is a whopper, CBO assumed this wonderful outcome would occur only if the revenue portion of Ryan’s plan generated 19 percent of GDP in taxes. And there is not the slightest evidence that would happen. Even though Ryan’s plan has a detailed tax component, his staff asked CBO to ignore it. Rather than estimate the true revenue effects of the Ryan plan, CBO simply assumed, as the lawmaker requested, that it would generate revenues of 19 percent of GDP.

You know the old joke: Two economists are stranded on a desert island with only canned food to eat. But they have no way to open the containers. What do we do,” asks one. “Assume a can opener,” replies the other.

When it comes to Ryan’s plan, CBO has, in effect, assumed the can opener.

That’s not all. CBO does not actually analyze many of the specifics of Ryan’s plan. Rather it looked only at what Doug called a “highly stylized” version of Ryan’s tax and Medicaid reforms.

In fairness, the CBO letter is filled with such disclaimers. In the second paragraph, it says, “This analysis does not represent a cost estimate for this legislation.” It couldn’t be more clear, but this is Washington, where nobody ever gets to the second paragraph. And,  despite the caveats, the CBO letter does include a table that shows what would happen to the deficit, given all the heroic assumptions it made. 

I have written before that Ryan deserves kudos for thinking about deficit reduction so broadly. In his “roadmap,” Ryan bravely tackles entitlement spending and recognizes the need for tax reform. I disagree with most of the details of what he’d do, but he gets a shout-out for trying.

Ryan would reduce future Social Security benefits and create voluntary private accounts, much like the old Bush plan; turn Medicare into a voucher program starting in 2021; and cap spending for Medicaid, now an open-ended entitlement.

On the tax side, it would make some huge changes. Ryan would: turn the current exclusion for employer-sponsored health insurance into a refundable credit; allow people to choose to pay either under the current income tax system or a two-rate, broad-based alternative; replace the corporate income tax with a business consumption tax, and exclude from tax dividends, capital gains, interest, and estates.

We don’t have any idea what this plan would do to revenues, but in some ways it resembles former GOP presidential candidate Fred Thompson’s campaign plan. TPC figured that scheme would reduce tax revenues by between $6 trillion and $8 trillion over 10 years. Unless Ryan can achieve unrealistically large cuts in spending as well, this is not exactly a roadmap to solvency in my book.        

     

An OMB spokesman tells TaxVox that President Obama’s tax reform panel still plans to report its findings to the president. The spokesman clarified comments on Monday by Budget Director Peter Orszag that suggested the panel’s report would be rolled into the White House’s recently-announced deficit reduction panel, rather than released separately.

However, the spokesman did not say if, or when, the tax reform panel report would be made public. The commission is expected to suggest only a laundry list of potential reforms, but will not recommend specific tax changes. 

It appears that Budget Director Peter Orszag has signaled the end of President Obama’s ill-fated Tax Reform Commission. In his budget briefing yesterday, Peter had this to say:

Q  The President was supposed to receive tax reform recommendations in December and that was delayed indefinitely.  Is there a possibility that that could be folded into the fiscal commission's review, or is it just on the back burner?
DIRECTOR ORSZAG:  I would imagine that it will be folded into the fiscal commission.  I would imagine that -- again, the commission will be examining a variety of things, including tax reform.

If true, this may be the best possible end to an embarrassing episode. The commission began life under impossible constraints, including the directive that it could consider nothing that raised taxes on those making less than $250,000.

Eventually, the White House put out the word that the panel would produce only a laundry list of possible reforms, but would not make any recommendations. The final blow came in December when the panel’s deadline came and went with only a White House promise that the group would complete its work “after the holidays.” Which holidays, exactly, were never specified. 

Now, it seems the tax panel’s work will be rolled into a deficit reduction panel to be named later—another group whose mandate is unclear, to say the least. Will the fiscal commission have to operate under the same limits as the tax panel? What will be, as they say, “on the table?”

We shall see in due time, I suppose. But the fiscal panel's life couldn’t be much worse than that of the ill-fated tax commission. Let’s hope the President has learned something from this sad affair.     

President Obama broke new ground last year by presenting a budget that assumed changes in the tax law as part of his baseline. Because no one wants to see the Bush tax cuts disappear as scheduled next year or the estate tax go after mere millionaires or the AMT hit a third of all taxpayers, his 2010 budget simply assumed that 2009 tax rules would become permanent and ignored the cost of forgone revenue.

That made some sense, given that Congress would never allow all of the tax cuts to disappear or the AMT to affect so many of their constituents. Building those provisions permanently into the baseline only recognized reality, making budget projections both more reasonable—and more drenched in red ink.

This year the president has taken his baseline approach a step further in a way that makes much less sense. His 2011 budget baseline assumes that two provisions of last year’s stimulus bill—expansions of the child tax credit and the earned income credit—become permanent and join their older siblings in the baseline. (I found this only when TPC colleague Elaine Maag pointed out footnote 5 on page 170 of Analytical Perspectives. Talk about burying the news.) Although I happen to think both provisions make sense, they don’t belong in the baseline until Congress makes them permanent.

The 2010 Green Book is a little more transparent but not much. A footnote to the table of contents and a closing sentence in the appendix reveal the secret.

We all know that we face rough budget times ahead with huge deficits stretching on forever. Dealing with that situation is not made easier by relabeling tax changes to shield them from view.

With great fanfare, the President in his 2010 State of the Union address announced a new small business tax credit that will go to “over one million small businesses who hire new workers or raise wages.” A White House fact sheet described the credit as a “powerful short term incentive to not only create good jobs but to increase wages and hours for Americans with jobs.”

Providing a credit to businesses that raise jobs or payrolls has been discussed over the past year as a possible anti-recession measure. My colleague Howard Gleckman has written several posts expressing skepticism of its effectiveness, while some academic economists have defended the idea. As with any other policy proposal, the devil is often in the details, so I eagerly awaited the release of the President’s budget and the Treasury Department's Green Book for a more complete description of the proposal and revenue estimates.

To my surprise, however, I could not find the proposal either in the Green Book or the chapter in the Analytical Perspectives volume of the budget that lists revenue proposals. Thanks to my more persistent and diligent colleagues, I can report that the category labeled “Allowances” in the list of revenue proposals on page 188 of “Analytical Perspectives” does contain a budget line item for “jobs initiatives.” This item will cost the Treasury $12 billion in fiscal year 2010, $25 billion in fiscal year 2011, and an additional $13 billion in fiscal years 2012-2014 - in the ballpark of what Administration spokespersons indicated the new jobs credit is likely to cost. There is, however, no description of the actual proposal in the budget documents, possibly because some details were resolved at the last minute or are still unresolved.

The alert reader of the Green Book would have been tipped off to this estimate by footnote #3 of the revenue table on page 150, which reads: "Table 14-3 in the Analytical Perspectives of the FY 2011 Budget includes the effects of a number of proposals that are not reflected here. These proposals include the making work pay credit, increase fees for Migratory Bird Hunting and Conservation stamps, change retention policy for consular fees, trade initiatives, integrate program integrity adjustments — IRS, revise terrorism risk insurance program, and the allowances of health insurance reforms and jobs initiatives."

Very little in President Obama’s 2011 budget, released this morning, is new. But the numbers…. Even in Washington, where we throw around trillions of dollars as if they were Hershey’s Kisses at Halloween, these numbers take your breath away.

 

This year, the federal government will spend $3.7 trillion, but will collect only $2.2 trillion. That gap of $1.5 trillion would be equal to more than ten percent of the national’s total economic output.

 

Next year, according to Obama’s fiscal plan, spending would increase to more than $3.8 trillion. Revenues would rise by two full percentage points of GDP to almost $2.6 trillion. Thus the deficit as a share of GDP would shrink to 8.3 percent. After that, matters would improve somewhat more (thanks in part to a growing economy) but the deficit would never fall below 3.6 percent of GDP. And still, the total debt held by the public would grow from an already-troubling 63 percent this year to 77 percent by 2020.

 

But even these deficits are based on some exceedingly wishful thinking. For instance, Obama is proposing nearly $500 billion in business tax increases over the next decade, including $122 billion from international tax hikes, $40 billion from fossil fuel producers, and $23 billion from hedge funds. Most were included in last year’s budget and went nowhere. There is no reason to believe he’ll have any better luck this year. He also once again proposed to cap the tax value of itemized deductions at 28 percent, which would raise almost $300 billion over 10 years. This idea too has gone nowhere, and if it ever gets traction, the money is likely to be used to pay for health reform.

 

On the other side of the income statement, Obama is proposing to extend most of the now-immortal tax extenders for only one more year (the R&D credit would be permanent). He’d also increase his signature “Making Work Pay” tax credit for just one year. He has, by the way, lost the revenue source he’d planned to use to pay for continuing that credit—his climate change bill. While it is still in his budget, the global warming effort is dying on Capitol Hill and even if a bill somehow passes, there is little chance the government will see much revenue from the proposed cap and trade system of pollution rights. Obama had proposed auctioning them and dedicating about $60 billion-a-year to the Making Work Pay Credit, but the House version gives them away.

 

It is possible that Obama’s proposed deficit commission will break this logjam, and make some of these tax hikes possible. But I know nobody who believes it. Democrats are already howling about Obama’s small proposed domestic spending freeze. And Republicans are not budging from their resistance to all things Obama.

 

Senator Judd Gregg (R-N.H.) is a good guy and, left to his own devices, is serious about deficit reduction. But even Gregg can’t pass the laugh test anymore. This morning he put out a press release entitled “We Need a Game-Changing Budget, Not More of the Same.” This from the top budget-writer of a party that passed an unfunded Medicare Part D drug benefit and massive tax cuts when it controlled Washington, and just last week voted in lockstep to oppose efforts to restore paygo rules for tax cuts and entitlement spending. Oh, and a majority of GOP senators even opposed Gregg’s own plan to create a deficit reduction commission. 

 

It is easy to say we can’t go on like this. But, somehow, we do.

To the surprise of nobody, President Obama has proposed new tax subsidies for businesses that hire additional workers by the end of the year. Structured as a payroll tax holiday, the plan would give companies a $5,000 credit against their share of Social Security payroll taxes for each net new hire, plus a “bonus” 6.2 percent credit for real increases in overall wages. Because the subsidy would be capped at $500,000, small business would be the big winner.

Think of this as a jobs version of cash for clunkers or the homebuyers’ credit. The explicit goal is to get employers to accelerate hiring into this year. An optimist would see this as a plan to jumpstart hiring and accelerate the virtuous demand cycle that usually kicks a sluggish economy into gear (the more people who go to work, the more likely they’ll buy stuff, and the more people companies will hire to make the stuff these new consumers want to buy). On the other hand, a cynic might say it is an effort to bail out terrified Democrats by paying companies to hire new workers before the November elections. It might even help Democrats take credit for hiring that was going to happen anyway. A jobs bill, true, but not quite what most of us have in mind.

This proposal would cost between $30 billion and $35 billion for this year alone. The White House won’t say publicly how many new jobs it expects to create, but administration officials expect a minimum of 600,000.

The problem with subsidies such as this is that they are exceedingly sloppy. A lot of money goes to those firms that would have hired anyway. This, in fact, was the experience with the homebuyers’ credit. It set off a flurry of new home sales last fall as buyers rushed to beat the deadline for getting the subsidy (Congress eventually extended it, but that's another story). Once the tax-generated boomlet ended, the market fell off the table in December. 

The timing of today’s credit is very different than last winter when Obama proposed a different jobs tax incentive while the U.S. was in the depths of the recession. I was very skeptical then, in part because it was hard to imagine many firms hiring even with a tax holiday. Now, with the economy recovering (GDP grew by 5.7 percent in the fourth quarter of 2009), it is much more likely companies will take advantage of the credit. That’s the good news. It’s also the bad news, since more will also take the credit for doing what they would have done anyway.

To its, um, credit, the White House seems to have carefully designed this version. It set reasonable anti-abuse rules (one can think of all sorts of ways unscrupulous firms could game this subsidy). On the other hand, it is trying to keep the credit simple, so it doesn’t discourage companies from participating.

Also, the last time Congres tried this in 1977-78, it turned out that relatively few businesses knew about the credit, but it should be much easier for Obama to get the word out. That too will create more both more gross hires and more free money.     

CBO recently gave this design a good grade for boosting growth and employment. It concluded that a plan like this  would increase GDP by somewhere between 40 cents and $1.30 for every dollar of budgetary cost. That’s not as good as increasing aid to the unemployed, but is comparable to boosting infrastructure spending. Creating new subsidies to jolt the labor market may not be great tax policy. But, if you are a Democratic office holder fixated on the top-line unemployment number, it might be the best option out there for some much desired personal security.  

 

The delivery was quintessential Barack Obama, which is to say brilliant, but the words could have been Bill Clinton’s.

The lofty principles remain, but the agenda has become pedestrian—constrained by a $1.4 trillion budget deficit and partisan trench warfare where progress is measured in inches and not miles.

A state of the union address that was supposed to herald passage of a massive health reform bill as the centerpiece of the president’s first year in office instead looked back at far more modest achievements: “We cut taxes for first-time homebuyers…We cut taxes for 8 million Americans paying for college.” And, he added, “We stabilized the financial system.”

Economic historians may conclude that saving the banks in the midst of both a massive financial panic and a political transition was the signature event of the past year. But Obama the politician knows that in the meantime, he’s getting no shout-outs for his trouble. Not from the banks he saved—whose arrogance and sense of entitlement in this episode reek. And not from voters. As Obama said last night about the bank bailout: “I hated it.You hated it. It was about as popular as a root canal.”

Looking forward, Obama could only display his scaled-back ambitions: Trade agreements with Panama and Colombia, a national competition to improve schools, and tackling childhood obesity are all important, but they are a far piece from the president’s clarion cry of “change you can believe in.”

Similarly, the president’s vision for health reform is far narrower than a year ago. He said little about controlling long-term health costs or delivering care more efficiently. Instead, he focused on modest insurance reform, and cried out for “better ideas” from Republicans.

And what of tax policy? Not a word about reform, or the need to restructure a crumbling revenue code. Instead, he offered only what appear to be a clutch of highly targeted business tax breaks: a tax credit for small businesses who “hire new workers or raise wages,” eliminating capital gains taxes for small firms, and new tax incentive for all companies to invest in capital equipment.

Much of this reflects the Democrats' focus—one might even say obsession—with bringing down the unemployment rate before the November elections. I’ve been skeptical about these tax subsidies, but, who knows, they may help a bit in the short run.

What they do not do is add up to what Obama described when he spoke to Congress last February. Then, he portrayed his initiatives as “a vision for America…a blueprint for our future.” I didn’t hear any of that last evening.

 

With Democrats crying for a jobs bill they can bring to voters before the November elections, it looks like President Obama may be about to propose a new version of a jobs tax credit. We’ll take a close look at the proposal once it is released, but in case you want to learn more about the issue, take a look at some past TaxVox posts here and here. I am skeptical about the credit, but had a good debate with Tim Bartik and John Bishop, who are strong supporters of the idea. Don't forget to check out their comments. 

The president has been attacked from the left and the right for his proposal to freeze non-security discretionary spending.  The left feels betrayed that their leader would apply a scalpel (the administration’s term) to favored programs.  The right whines that the freeze would amount to a drop in the overflowing bucket of red ink, and the quarter trillion in savings pale in comparison to the $10 trillion in deficits expected over the next decade. 

The left needs to wake up and read the election returns.  If ultrablue Massachusetts is sending conservative Republicans to Washington, it’s clear that the U.S. isn’t Sweden, or even France.  The growth of government will have to be constrained and applying a scalpel to less effective programs is, as Howard Gleckman said, “a start.”

As for the Republicans, get real!  Yeah, the big problem is entitlements and not discretionary spending. But when President Obama tried to limit Medicare growth in the health reform bill, you guys emerged as the defenders of the seniors’ health program. How do you suggest the president take on mandatory spending?  How about a budget commission?  No, you and your liberal co-obstructionists in the Senate shot that down yesterday. 

Cutting discretionary spending is hard for a Democratic president.  Republicans who care about the size of government should applaud rather than sneer.  (Encouragingly, Senator McCain and a few other prominent Republicans have expressed support, although the leadership is still dismissive.) 

But I've concluded that Obama’s freeze isn’t aimed at either Republicans or the Democratic base. It’s a populist move meant to assuage those who are ticked off that the federal payroll has grown while private-sector jobs have been vanishing at an alarming rate. The message in the freeze is that government jobs no longer come with life tenure. To that end, Pelosi and Reid’s protestations are a plus—if the president can put together a coalition to implement the freeze.  And such a bipartisan coalition would provide comfort to the independents who are fleeing Obama’s camp.

That said, the freeze is a risky move.  If the President can’t pull it off, he’ll lose the populist boost while undermining his base support.

It has been an interesting day for us fiscal policy wonks. Over my morning muffin, I digested President Obama’s plan to freeze some domestic spending for the next three years as well as his package of aid to the middle-class. Then, I spent a few hours chewing over the CBO’s latest budget projections. Finally, I watched the Senate trash the bipartisan budget commission.

Add it all up, and we are pretty much where we started, although some important issues are becoming clearer.

To take things slightly out of order, In today's budget update, CBO figures the 2010 deficit will be about $1.35 trillion, or 9.2 percent of GDP. We could cut the deficit in half by 2012 if Congress allows the Bush tax cuts to expire, lets the Alternative Minimum Tax bite 30 million middle-class Americans etc.—none of which is going to happen.

Obama, who has heard the growing public concern about federal red ink, has proposed an updated version of Mike Boskin’s old “flexible freeze” from the days of George H.W. Bush. Obama would hold overall domestic discretionary spending at today’s levels for three years, although he’d increase the budgets of some programs while cutting spending for others. Administration officials say this would save $15 billion in FY 2011 and about $250 billion over 10 years.

There are several problems with this: $15 billion is pocket change in a $3.5 trillion budget, and it is foolish to focus deficit reduction on 13 percent of the budget while ignoring the rest. For instance, at $528 billion, the Medicare program alone far exceeds all of the spending--$447 billion--that would be subject to Obama’s freeze. In addition, since the pressure will be enormous to “catch up” on domestic spending once the freeze ends, it is hard to believe it will save $250 billion over 10 years.

The freeze will also drive still more social policy to the tax code. Obama’s package of middle-class relief already includes expanded tax credits for child care and retirement saving. There will be plenty more where they came from. 

For all of its shortfalls, however, the freeze would be a start. You know the old joke: When you’re in a hole, the first thing you do is stop digging. At least Obama would be digging with a smaller shovel.  

Finally, the commission: I doubt it would have ever accomplished much, but it was at least a vehicle to raise the profile of the fiscal problem. And its death does clarify some things.

We know now—if we ever had any doubt—that Republicans will oppose any serious deficit reduction as long as Obama is president and they are in the minority in Congress.  This was clear last year when the GOP remarkably opposed Obama’s efforts to slow Medicare growth as part of health reform. Today, 23 Senate Republicans opposed the commission, mostly because it might, gasp, recommend tax increases. Thus, the GOP view is we should balance the budget without touching Medicare or raising taxes. I’d like to see how.

At the same time, for all of Obama’s rhetoric about fiscal responsibility, liberals and unions are not going to let him mess with Social Security. The lesson they learned from getting outflanked by Republicans on Medicare is they will never, ever, let the GOP get between them and angry old people.

So we are still in the hole, and we are still digging.        

The Earned Income Tax Credit (EITC) is the nation’s largest cash assistance program for low-income workers.  In 2007, 24.5 million ...   more »

Can we fix our budget problem by raising income taxes alone? With deficits as far as the eye can see, Rosanne Altshuler, Katie Lim, and I presented a paper at last week’s TPC/USC budget conference that came up with a fairly straight-forward answer: No.

We set a low bar for ourselves. Instead of trying to balance the budget, we aimed to cut the deficit to a sustainable 2 percent of GDP. And we wouldn’t even start to do the heavy lifting until 2015—to give the country time to regain its economic footing.

The Congressional Budget Office projects an average deficit over the 2015-2019 period of 3.2 percent of GDP under current law—that is, if the Bush tax cuts expire next year as scheduled and Congress stops patching the AMT. The average deficit jumps to 6 percent of GDP in the more likely event that Congress follows current policy and makes both the Bush tax cuts and AMT patches permanent as the president has proposed.

Katie used TPC’s tax model to simulate three income tax increases scaled to meet our deficit goals under both current law and current policy: raise all tax rates proportionally, raise just the top three income tax rates, or raise rates for taxpayers targeted by President Obama—couples with income over $250,000 and singles with income over $200,000. We also tried eliminating or limiting itemized deductions.

The results were discouraging, to say the least. Under the higher tax baseline of current law, we’d have to raise all individual rates by 15 percent to meet our 2 percent deficit goal. But under the lower-revenue scenario of current policy, rates would have to jump nearly 50 percent. In other words, the 10 percent bracket would become nearly 15 percent and the 35 percent top rate would go to 52 percent.

What if Congress just raised taxes for high-income taxpayers? Their rates would go up more than 40 percent under current law and more than 150 percent under current policy. In other words, the top tax rate would return to the bad old days of 90 percent. Even if we go for the Administration’s more modest goals—start with current policy and aim for deficits averaging 3 percent of GDP—those top tax rates would have to more than double, taking the top rate over 75 percent.

And our estimates ignore behavioral response. Research has shown that tax increases lead people, particularly at the top of the income distribution, to cut back their taxable income. While analysts disagree on the magnitude of that income shift, they’d all acknowledge that cranking the top rate up to 90 percent would lead to a massive reduction in taxable income and hence a lot less additional revenue than we found. People facing those high tax rates might work less or hire smart accountants. Either way, reaching our 2 percent deficit goal would require even higher tax rates and would quite likely prove impossible.

If we start with current law, we could also meet our goal by eliminating all itemized deductions, but that wouldn’t yield enough revenue under current policy. Besides, wiping out popular deductions for home mortgage interest, state and local taxes, charitable contributions, and other expenses would never fly.  We even looked at capping the tax-reducing value of itemized deductions to 15 percent, but that wouldn’t raise nearly enough under either current law or current policy. (Last year, Obama proposed a more lenient 28 percent cap.)

Our simple exercise yields two important messages: We can’t balance the budget with income tax increases alone. We also have to cut spending and perhaps look for another revenue source as well. VAT, anyone?

George Bush could have proposed the Senate health bill. If he had, those Republicans who now loathe the measure would be at the barricades defending it. And those Democrats who backed Obama-care for the past year would have been hoisting their  pitchforks and demanding its demise.

Leave aside the million details that are grist for the Washington policy mill and think for a minute about the framework of this bill. As I’ve written before, it is pretty simple and not very radical. At its core is a health system that relies on employer-based private insurance to cover most working people. The old would continue to be insured by Medicare and the poor would be covered by Medicaid, just as they are today.

The changes: Insurance companies would have to offer coverage to all, regardless of pre-existing conditions; everyone would have to obtain basic coverage or pay a penalty; exchanges would enhance the individual insurance market; the government would subsidize premiums for those who cannot afford them, including both individuals and small businesses; and Congress would take some small steps to slow the growth of health costs.

None of these ideas are new and most used to sit comfortably in the GOP mainstream. The Senate bill mimics the framework of the 2006 Massachusetts health reform, an idea that was pushed by Republican then-Governor Mitt Romney and, as we know by now, was supported by new Massachusetts Senator Scott Brown. This is what Romney said about the bill after it passed: "Every uninsured citizen in Massachusetts will soon have affordable health insurance and the costs of health care will be reduced." Sound familiar?

The Bay State model was so important in the Washington debate that congressional health negotiators privately described their road to a final bill as “going down Massachusetts Avenue.”  

And the Massachusetts plan was not just Romney’s idea. Staffers at the conservative Heritage Foundation provided extensive technical guidance, and the broad outlines (if not all the details) were widely praised by the right—at least until the 2008 presidential campaign, when Romney denied parentage of his own reform bill. 

But this model was around long before 2006. In 1993, Republican senators Bob Dole and John Chafee proposed a reform that included an individual mandate, cost controls, and generous government subsidies. In 1994, a bipartisan bill sponsored by Chafee and conservative Democrat John Breaux included many of the same elements—including an exchange, individual mandates, and cost containment. Blue Dog Representative Jim Cooper (D-Tenn) proposed a similar measure. Back then, the unions and many liberals opposed Breaux-Chafee because they disliked both its individual mandate and its tax on high-cost employer sponsored insurance. They still hate the tax, but seem OK with a mandate in a Democratic bill.  

The bottom line is that much of the battle over health reform is not about substance at all. If it were, Democrats and Republicans could have gotten together last year and reached a workable consensus reform that, indeed, would look a lot like the Massachusetts—or the Breaux-Chafee—design. But that, it seems, was never in the cards. It was politically much more productive to caricature the plan as a government take-over of health reform or a big new tax on working people.