Scoring Tax Reform: Budget Baselines Don’t Really Matter

By :: December 2nd, 2010

My TPC colleague Howard Gleckman wrote the other day about the confusion caused by the multiple baselines advocates use to measure the effects of tax proposals. But baselines don’t really matter. What’s important is not where we start or how things change but where we end up.

Baselines are largely political. Partisans use whichever version strengthens their ability to bludgeon opponents in an essentially Inside-the-Beltway game. Voters, thoroughly confused by this arcane and complex scorekeeping, can’t figure out who’s telling the truth.

Because a baseline does give you a starting place from which to calculate change, it helps measure the effects of tax proposals. You can see that a new tax raises revenues compared to some prior year, or that it raises taxes for high-earners relative to what they paid at some time in the past. But those are often the wrong questions.

The trouble is that these starting points are entirely arbitrary. There is nothing inherently “right” or “wrong” about the tax law as it was in 2000, or in 2003, or this year. Nothing makes any of them more or less worthy as a basis for measurement. The problem with evaluating whether a given policy yields a good outcome is our lack of agreement about the right answer. A tax that strikes me as too regressive may seem too progressive to you. Federal revenues claiming 20 percent of GDP will look egregiously high to people who want smaller government but anemic to those who want government to do more.

The right question is what does a particular level and design of tax mean for individuals and the economy.

For example, letting all the 2001-03 tax cuts expire would mean federal revenues will total about 20 percent of GDP over the coming decade; making them all permanent would cut that share to roughly 18 percent. This is true no matter what baseline you start from. By contrast, President Obama’s plan to extend the cuts for all but the highest-earning 2 percent of households would claim 19 percent of GDP. Each option would also distribute taxes in its own way across households in different income categories. This is also true regardless of what baseline you start with.

What you must do is ask yourself these questions: Given growing concern about exploding federal deficits, does a particular tax policy generate enough revenue to fund the government you want? Does it collect revenues in the most efficient way so it does the least harm to the economy? And does it spread taxes fairly across the income distribution? Those queries are hard to answer but pondering them is far more useful than asking whether taxes will rise or fall relative to a baseline, or whether it will take more or less income out of the pockets of those in a particular income group than it did at some time in the past.

Of course, tax policy choices will always be political. And since we have no absolute standard for assessing taxes, any evaluations of proposed changes will always be subjective. But as you listen to the Washington debate, keep your eyes on the prize: not baselines but on where we end up.

4Comments

  1. Michael Bindner  ::  10:21 pm on December 2nd, 2010:

    I'm all for not only full funding but debt repayment and put forward a plan to do that, however each major plan has their own pocket experts already. Rivlin Domenici had the TPC (which is why I suspect my plan was not scored here – you guys were busy and did not need another message, especially a libertarian socialist one), while the Peterson folks helped out the Fiscal Commission, so they did not consider other people's options.

    Among the more extreme views, some of which happen to control the House of Representatives, are the ending of the Federal Reserve – but by defaulting on the debt rather than by paying it off first. Essentially, these people need education, since from the first instance the Fed was about stabilizing the currency and the national debt. It cannot be abolished until it is paid in full – as much as the Tea Party wants it to be otherwise.

  2. Anonymous  ::  5:37 am on December 3rd, 2010:

    Classifying certain tax breaks (which one hopes to repeal) as “tax expenditures” is another variant of the game of moving the baseline to score political points. This is likely to be the next big economic argument, with some arguing, for example, that repealing the mortgage interest deduction should be scored as a spending cut rather than as a tax increase.

    My opinion on this issue is that a tax break enjoyed by nearly all taxpayers is effectively a reduced tax rate. A tax break enjoyed by only a few, if not needed for horizontal equity or proper measurement of income, is effectively a spending program. In between these extremes tax breaks cannot be simply classified.

  3. Does the Gang of Six Cut Taxes or Raise Them? « Donald Marron  ::  3:49 pm on July 20th, 2011:

    […] P.P.S. What really matters, of course, is the plan itself, not how it scores against some possibly arbitrary baselines. Bob Williams makes that point here. […]

  4. Federal debt drama at state level  ::  1:26 pm on August 19th, 2011:

    […] Budget Office’s “current law baseline,” which adjusts for inflation. Baselines are often political creations but they sometimes matter a lot—Standard and Poor’s really blew it by assuming the wrong […]