What the Long-term Revenue Changes in Obama’s Budget Would Achieve

By :: February 5th, 2010

  

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.

5Comments

  1. Anonymous  ::  4:46 pm on February 5th, 2010:

    In the long term, the Baby Boomers will die off. In the longer term than that, demography is so uncertain that projections don't matter. This takes care of Social Security's Old Age pension problem, which will likely be taken care of by either borrowing or further increased taxes on the wealthiest.
    The real concern is Medicare and senior Medicaid. The taxes needed to match the promises of Bush and the former Republican Congress need to be broad based, largely because the benefits are broad based. Eventually the President needs to decide he needs to frame the question that way and the public and our creditors need to decide whether they prefer borrowing or American consumers with less spending money – or rather they need to decide if they want this to be a priority in 2012 or not. Obama seems to not want to make it a priority and in a recession it looks like the public is happy with that. Of course, in two years, all bets may be off.
    The other thing to remember about the long term deficit is that the wars in AFPAC and Iraq won't last that long and a war with Iran will likely not materialize. In 2020, we simply won't need as big a military, which will allow spending in that sector to go down to Clintonian levels. bin Laden, al Zawahiri and Kim Jung Il won't live forever. Indeed, they may not even live until 2012. When the Koreans tire of tyranny (and everyone does, eventually) and an eventual rising Arab/south Asian middle class crowds out Jihad there will be a time when the Pentagon just can't justify its size and the number of General Officer billets will be drastically reduced – along with procurement budgets.
    Finally, we are not in a permanet recession. Eventually the housing market will recover or stabilize and incomes will catch up to housing values. Changing economic status will decrease the deficit in the long term.

  2. Anonymous  ::  11:26 pm on February 6th, 2010:

    The Economic Fractalist's Second Modest Proposal: The IRDC US Political Party
    The IRDC Super Party: The Independent Republican Democrat Centrist Super Party
    The global monetary-banking-financial system that forms the basis for possibilities of reasonably fair and socially beneficial economic growth is …. simply … broken.
    The self designated defacto fixers of that broken system are in fact both the principal causal elements of the broken system and the members and beneficiaries of the current broken system.
    With the old system's failed and bad rules enforced by its current principal beneficiaries, the broken system will never be fixed.
    There will only be more disproportional rewards for the owner of the broken system: the self acknowledged too big to fail financial industry.
    Kindly consider this. The rewards and benefits of the members of the financial cartel are in reality much greater than the often quoted nominal 2009 over 2007 gains. That 2009 purchasing power of the cartel's members' earnings is denominated in surviving dollars in an environment of a 20 percent reduction in US citizen net household wealth over the last 30 months and a 5-6 percent increase in unemployment that reduces the demand side cost of wages. Real estate can now be purchased for both 15 percent less and with lower interest rates.
    (The leveraged damage done to US citizens are relatively greater than other world citizens and their fiat currencies… any questions regarding a rising dollar relative to other fiat currencies?)
    Those 2009 dollars earned, but for congressional intervention and tax-payer re bankrolling, by a bankrupted financial industry, can now buy 20 percent more than in 2007 more and likely 30-40 percent more later in 2010.
    The Financial Industry members have made out like the bandits they are.
    Cicero two millennium later speaks: Res ipse loquitor….
    What would be a sine qua non metric target for a successful stable fair real economy? One possibility would be a working citizen benefited monetary financial system where, for example, graduates going into an engineering careers or teaching careers earn more than graduates going into the financial industry.
    With the owners of the monetary system firmly in control of congress, is there any possible hope for remedy?
    Perhaps.
    Perhaps it is time for the establishment of a coalition super party – the IRDC party.
    The IRDC party, the Independent Republican Democrat Centrist party (the C could also represent Constitutionalists) likely already includes the philosophical, if not the I want to be re-elected – majority of US congress people.
    The Centrist IRDC platform is simple. Create a fair economic system that values hard work and economic creation of useful real goods and services and conversely implements effective new rules which restricts private citizen or corporate wealth creation from manipulation of the monetary system.
    Politicians could run either as an IRDC candidate, an independent, a republican, or a democrat supporting the centrist principal platform of restoring real fairness and worth to the economic system. After successful election republicans, democrats and independents who ran on their respective republican, democrat, and independent tickets and who supported the IRDC platform could then join a majority IRDC caucus and be a member of a majority party entitled to chairmanship of key committees.
    Think about it. The IRDC Super Party – a great reckoning for Wall Street and the Wall Street run world.
    The establishment of a Super Party Constitutional and Centrist majority offers the chance to begin anew with new rules and underlying new principles to engender fairness and a rationale allocation of wealth for the 21st century. (A drop in the bucket of time but so good for the world's grand children.)

  3. Anonymous  ::  2:50 pm on February 10th, 2010:

    The only way to really accomplish the IRDC goal is to create private retirement accounts with money diverted from FICA into direct employee ownership, with an accelarated transition option (no more FICA taxes if all current and past employees are made whole – i.e., if they are given stocks equal to what they would have if they accumulated from Day 1). This could be done by distributing retained equity. Of course, this would croud out the secondary markets and end stock speculation entirely. If such employee owned firms also offered financial services to their employees directly (mortgage, educational and consumer credit), then the entire banking system would be subsumed into individual Human Resources and Accounting departments and the independent financial sector would mostly be dead. Unless you are willing to take such a radical step, there is no way out of banker hegemony.

  4. Anonymous  ::  2:10 am on February 11th, 2010:

    Wait a minute.
    4.8% increase in revenue as a percentage of GDP yields $1.2 trillion in 2020?
    You are honestly expecting a GDP of $25T in 2020, up 77% from 2007 (before the crash, and the current FY the IRS talks about in http://www.irs.gov/taxstats ? I don't see that in the cards at all.

  5. Anonymous  ::  2:53 am on February 11th, 2010:

    By the way, what I have laid out above (which again, will be necessary to accomplish the IRDC's goals) is what is called libertarian socialism, aka left libertarianism. I don't think many tea partiers will stomach such a thing. I know the people who think they are pulling the strings (Armey, Palin, etc.) would never sit still for such an agenda.