What’s the Mix of Spending and Revenue in the President’s Deficit Reduction Proposal?

By :: April 12th, 2013

President Obama’s budget identifies a group of policies as a $1.8 trillion deficit reduction proposal. I found the budget presentation of this proposal somewhat confusing; in particular, it is difficult to see how much deficit reduction the president wants to do through spending cuts versus revenue increases.

After some digging into the weeds, I pulled together the following summary to answer that question:

 Budget Chart 2
The proposal would increase revenue by $750 billion over the next decade. Much media coverage has been incorrectly suggesting an increase of either $580 billion (revenue from limiting tax breaks for high-income taxpayers and implementing a “Buffett Rule”) or $680 billion (adding in the revenue that would come from using chained CPI to index parameters in the tax code).

But there’s another $67 billion in additional revenue. Almost $47 billion would come from greater funding for IRS enforcement efforts that lead to higher collections. To get that funding, Congress must raise something known as a “program integrity cap.” The administration thus lists this as a spending policy, but the budget impact shows up as higher revenues (assuming it works—such spend-money-to-make-money proposals don’t always go as well as claimed, although there is evidence that IRS ones can). Several similar administrative changes in Social Security and unemployment insurance add almost $1 billion more.

Another $20 billion would come from increasing federal employee contributions to pension plans. That sounds like a compensation cut to me and, I bet, to affected workers, and would be implemented through spending legislation. Under official budget accounting rules, however, it shows up as extra revenue as well.

In total, then, “spending” policies would generate more than $67 billion in new revenue.

Taken as a whole, the president’s deficit reduction proposal includes $750 billion in revenue increases, $808 billion in programmatic spending cuts, and $202 billion in associated debt service savings. The proposal thus involves about $1.1 in programmatic spending cuts for every $1 of additional revenue.

At least according to traditional budget accounting. If you believe (as I do) that many tax breaks are effectively spending in disguise, the ratio of spending cuts to tax increases looks much higher. From that perspective, much of the $529 billion that the president would raise by limiting deductions, exemptions, and exclusions for high-income taxpayers should really be viewed as a broadly-defined spending cut. I haven’t had a chance to estimate how much of that really is cutting hidden spending, but even if only three-quarters is, the ratio of broadly-defined spending cuts to tax increases would be 3.5-to-1.

8Comments

  1. SteveinCH  ::  4:50 pm on April 12th, 2013:

    It is unfortunate that the President chose to change the baseline prior to allowing Mr. Marron to do his analysis. Certainly the macro number in terms of revenue increases is $1 trillion. In table S-1 of the budget, the President proposes to raise $41.2 trillion. The CBO baseline has revenue of $40.2 trillion. This is a $1.0 trillion increase. Yes, yes, the underlying macro assumptions are different and so forth but we cannot compare plans if every plan has its own baseline and its own projections. It renders the entire exercise a waste of time.

  2. Vivian Darkbloom  ::  10:34 am on April 13th, 2013:

    It would be very useful if both Houses of Congress and the President were to be required to use consistent formats and baselines in presenting their budgets. In comparison to the President’s budget proposal, the Murray and Ryan proposals were relatively easy to reconcile. Both of those worked from the CBO’s latest forecast (February 2013).

    In contrast, the President’s budget works from something called the “Balanced Budget and Emergency Control Act (BBEDCA) Baseline”.

    I have not attempted to go through and reconcile the different baselines. That would be very difficult to do and time-consuming. I guess that’s the whole point—these proposals are intended to obfuscate rather than elucidate.

    The baseline games here are a bit more serious than shaving points on sports games. To take two small examples:

    CBO Baseline 2023 Deficit -$972 billion
    Obama’s BBEDCA -*1,041 trillion

    CBO 2023 NGDP projection $25,910
    Obama $26,331

    Every little bit helps. Increasing the baseline deficit allows one to claim a greater reduction. Increasing GDP makes it appear that both taxes and spending are lower.

  3. AMTbuff  ::  1:46 pm on April 13th, 2013:

    Donald, I’m sure you know that the dispute over the “program integrity cap” is a continuation of the fight over Obamacare. Republicans do not want to fund IRS costs to implement Obamacare’s taxes and its penalty “taxes”.

    One party cannot enact a massive program over the unanimous objection of the other party and then expect the other party to cheerfully implement the program. That has never happened in the history of politics. As you sow, so shall you reap.

    As to the baseline flim-flammery, I see that my optimism was misplaced. A permanent tax code eliminates baseline disputes over sunset provisions, but baseline creativity is irrepressible.

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