Baseline Redux: or When is a Tax Cut Not a Tax Cut?
Here we go again. I posted yesterday on a new TPC analysis of the tax cuts in President Obama’s proposed 2010 budget. The conclusion: Nearly everyone, even most of the very wealthy, would enjoy a big tax break. This, I suggested, was not smart, given the nation’s huge deficit and Obama’s ambitious priorities.
Not surprisingly, a commenter—AMTbuff—called me to task. While many of these revenue provisions represent tax cuts relative to current law, they are not when compared to current policy—that is, assuming all the 2001 and 2003 tax cuts are made permanent, the AMT is patched into the future, etc. According to AMTbuff, “using current law as the baseline is misleading [since] neither the public nor any experts expect all tax rates to spring back to pre-2001 levels.”
It didn’t take long for TPC’s Len Burman to weigh in. “The presumption,” he wrote, “really should be that all of the tax cuts expire.” We’ve been having this debate since Obama adopted a Bush-extended baseline during his presidential campaign—a choice that, among other things, made his proposed tax cuts look less costly than if compared to current law.
My take is somewhat different from both Len’s and AMTbuff’s. Buff sets up a straw man by arguing that no one thought “all” the tax cuts would return to pre-2001 levels. Of course not. But, neither did anyone expect “all” the Bush tax cuts would be extended indefinitely.
For instance, not a single financial advisor or Hill staffer I talked to ever thought the estate tax would actually be repealed in 2010. Hardly anyone imagined that Bush’s cuts in the top tax rates would survive his administration for long, especially once the red ink started flowing copiously in defiance of the usual, and always wrong, supply-side claims that tax cuts reduce deficits.
On the other hand, lots of folks figured other Bush tax cuts would have a much longer shelf life. It was a good bet, for instance, that Congress would keep extending the AMT patch.
Thus we are left in an analytical never-land. One could try to construct an alternative baseline based on a best guess about legislators’ intent nine years ago and an assumption of taxpayers’ beliefs today (and, btw, I’m not sure I buy the assertion that people believe today’s tax regime is cast in stone. I’ve never seen any evidence). But that exercise would only generate more arguments about assumptions and leave us with a Babel of competing “realistic” baselines.
All very interesting you say, but is the Obama plan a big tax cut or not? To answer, you need to use some baseline. And to my mind, the best of two poor choices is the law, flawed and unrealistic as it may be. Whenever possible, I use another, more straightforward, measure: How much revenue would government collect as a share of GDP and how much is it planning to spend. The President’s own budget answers that question: In 2010, he’d spend 8.5 percent of GDP more than he’d raise. The gap narrows once the economy improves, but even in 2019, it is still nearly 3.5 percent of GDP. Whatever baseline one chooses, that’s not a good thing.
I'm a believer in 3 or 4 baselines, with various assumptions about current law, inflation and policy. In an online world, they could be put in a spreadsheet and sent. Not having to print them is an advantage.
The last baseline would be based on the President's budget. (if the macro targets were enacted, how would current law be adjusted without action by the appropriations comittees). There would be an additional baseline calculation after the passage and signing of a Joint Budget Resolution. The totals would come from the JBR and the line items under current law would be adjusted to match – and would become law barring action by the political process. This would end the drama of continuing resolutions at the end of the year and give Congress an incentive to get its work done.
This is useless for tax policy, however you can do the same kind of multiple baseline exercise with current law, the current budget and current policy (whatever that is).
The confusion on this issue will actually be quite short-lived, since Congress must do something in the next few years to change the baseline consensus or currnet law will do it for them.
For another illustration of how different baselines put different slants on the same future policy, see http://keithhennessey.com/2009/04/21/baseline-games/
The budget baselines described there include both spending and taxes. The author of the linked web page never mentions this, writing as if the only differences were on the spending side and the growth assumptions, but the CBO baseline uses current law for taxes and the Obama baseline uses current policy. That author is playing a baseline game of his own by not revealing this crucial fact.
Howard, I think you nailed it this time. No realistic baseline exists. The baseline the public has in mind is not realistic, nor is the current law, and anything else is little more than a concoction of its author.
This is a sorry state of affairs. Perhaps the only answer is to look at each budget proposal de novo and forgo any comparison with previous policy or law. In the present circumstances, that would make the projected deficits even more frightening. Perhaps that's just what we need to get public support for closing the gap.