Does the Gang of Six Cut Taxes or Raise Them?
Here’s a quick multiple choice quiz about the Gang of Six’s new budget proposal.
Over the next ten years, would the proposal:
a. Cut taxes by $1.5 trillion
b. Increase taxes by $2.0 trillion
c. Increase taxes by $1.2 trillion
d. All of the above.
If you answered (d), you have a fine future as a budget watcher (or you peeked at the answer from the last time we played this game).
The answer depends on the yard stick you use to measure changes in tax revenues. Unfortunately, people now use at least three different yard sticks.
The first, known as the current law baseline, assumes that Congress doesn’t change the tax laws on the books today. That means every temporary tax cut expires in the next two years, including the individual tax cuts enacted in 2001/2003 and extended in 2010, the “patch” that limits the growth of the alternative minimum tax, and the current estate tax.
The second, known as the current policy baseline, assumes those three temporary tax cuts all get permanently extended.
The third, known variously as the Fiscal Commission’s plausible baseline or the alternative fiscal scenario of 2010, assumes that those three temporary tax cuts all get extended with one big exception: the tax cuts that benefit “high-income” taxpayers expire.
With three different yard sticks, we get three different measures of the impact of the Go6 proposal.
Relative to the current law baseline, the Go6 plan would be a $1.5 trillion tax cut. In other words, the Go6 plan would raise $1.5 trillion less in revenue over the next ten years than if Congress did nothing, and all the temporary tax cuts expired. That’s an important number because the Joint Committee on Taxation and the Congressional Budget Office are required to use current law in preparing official budget scores.
Relative to the Fiscal Commission’s baseline, the Go6 plan is a $1.2 trillion tax increase. That includes three pieces: $1.0 trillion from reducing tax preferences (some of which may be the moral equivalent of cutting spending), $133 billion in new revenues for the highway trust fund (but not from higher gas taxes), and about $60 billion from using a lower measure of inflation – the chain CPI – to index the tax code.
Relative to current policy, finally, the Go6 plan is roughly a $2 trillion tax increase. In addition to the $1.2 trillion in tax increases noted above, it assumes an additional $800 billion in revenue – equivalent to what would be raised by allowing the “high-income” tax cuts to expire.* The Go6 plan would thus raise about $2 trillion more in revenue over the next ten years than if Congress simply kept in place the tax policies that apply in 2011 (except the payroll tax holiday, which everyone assumes will eventually expire).
Bottom line: You should expect to hear the plan characterized as anything from a $1.5 trillion tax cut to a $2 trillion tax hike.
P.S. For a similar discussion comparing two of the three baselines, see this nice piece by David Wessel of the Wall Street Journal.
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.
* I revised this sentence to emphasize that the plan includes revenue equivalent to letting the “high-income” tax cuts expire; it doesn’t actually let the rates expire – instead, it includes a wholesale reform that includes lowering the top rate to no more than 29 percent.
[...] my Tax Policy Center colleague Donald Marron noted this week, trying to sort through the various baselines in the Gang of Six’s bipartisan Senate [...]
[...] better bet is to read the always clear and interesting Don Marron on the revenues raised by the GangofSixandtheirbagofTricks. He explains my least favorite DC [...]
Baseline (a) is by far the most reasonable. The other two amount to saying, “Hey, at least the tax cuts we’re proposing are smaller than what some members of Congress want to enact.”
Not only that but the Gang of Six plan is pretty much a mirage. It calls for $500 billion in immediate spending cuts(when they are specified, they would likely also be a mirage) and leaves all the difficult spending and taxing decisions to be hashed out later, within some very, very broad parameters. What remains to be decided is the distribution of the tax increases and spending cuts which is, of course, the real issue and sticking point. We don’t seem to be getting anywhere, slowly, not fast. They just succeeded in kicking that can down the road, again.
[...] Marron at TPC breaks down the tax impact of the gang of 6 proposal. The size of the revenue impact depends on what you measure it against [...]
This will only work if the housing industry is ineffective in blocking it. I am not sure why the powers that be think they can do better at this than was done in 1986. The wealthy know a tax increase when they see one, so we might as well raise rates and divert the tax expenditures for mortgage interest and property taxes to an increased child tax credit – which might actually encourage families to have children and thus reverse the aging crisis.
As important is the issue of why we are limiting the plausible baseline change to $1.2 trillion. In the end, the entire process is being undertaken to avoid simply letting the Bush/Obama cuts expire. The President pretty much holds the cards, provided the Democrats in Congress back him. At some point, Democrats may decide they want more in taxes – possibly letting the top 3 rates reset to permanent law, rather than just the top 2.