What Would the Gang of Six Really Do to Taxes?

By :: July 22nd, 2011

As my Tax Policy Center colleague Donald Marron noted the other day, trying to sort through the various baselines in the Gang of Six’s bipartisan Senate budget plan is amusing, but not necessarily helpful. So, I’m going to take a different look: How much money would the government collect over the next decade under the Gang’s plan?

The answer, to my surprise, is pretty much what it would collect under current law: about $40 trillion from 2012-2011. And, according to the plan, it would do so while pretty much retaining the progressivity of the current code. In other words, the tax reform the Gang has in mind would lower rates on ordinary income and eliminate or scale back tax preferences for homeownership, health insurance, and other things. It would shuffle the deck chairs in some pretty interesting ways. And, all else equal, lower rates on a broader tax base are a good thing. But in the end, we’d be left with the same chairs on the same deck. And in fiscal terms, it would do almost nothing at all.

In fairness, I’ve made some pretty heroic assumptions. As I noted yesterday, the plan is almost impossible to analyze given its lack of specifics and, shall we say, flexible use of budget baselines (it uses at least three). The tax piece has, as far as I know, not been scored by Congress's Joint Committee on Taxation.  Thus, the Gang’s revenue goal is, you might say, more aspirational than real. Still, here goes:

Let’s start with that $40 trillion, which is the Congressional Budget Office’s estimate of what the government will collect in all taxes over the next decade. This assumes current law (that is the 2001/2003/2010 tax cuts expire as scheduled at the end of 2012 and temporary relief from the Alternative Minimum Tax ends). Now, one can argue about whether this is realistic but it has the analytical advantage of being, umm, the law.

Now, let’s say the Bush/Obama tax cuts are extended for all but the very wealthy and AMT relief also remains in place (which seems to be the Gang’s starting point) That would knock revenues down by about $3 trillion. But from there, the Gang says it wants to raise taxes by about $1.2 trillion. That gets us to about $38.2 trillion (40-3+1.2) This, more or less, is why the Gang also says CBO would score its plan as a $1.5 trillion tax cut. (I know, the numbers don’t quite add, but what’s $300 billion among friends).

But this estimate excludes unspecified increases in the Social Security payroll tax that would almost inevitably be included in a reform of the retirement program. I’m guessing that would increase revenues by another $1 trillion or more. And that, lo and behold, pretty much gets us back to where we started.

One other matter, as noted by Keith Hennessey at his blog. It is very likely that trimming tax preferences will generate much less real money than the Gang estimates, since it does not seem to have included behavioral changes in its revenue estimate. In other words, for instance, if you reduce the tax benefits of buying an expensive house, wealthy people will do something else that generates its own tax break and the net new revenue to the Treasury will diminish.

None of this makes the Gang’s plan a bad idea. That depends, of course, on your own “baseline” view of whether you think a deficit plan ought to include new taxes or not. But, I thought you’d want to know.