By James Kwak
Some of the headline numbers for President Obama’s deficit reduction proposal that you hear are the following:
- $3 trillion in deficit reduction over ten years—more than the $1.2–1.5 trillion expected from the Joint Select Committee (JSC)
- $4 trillion in deficit reduction, including the discretionary spending caps in the Budget Control Act
- $1.5 trillion in tax increases
- $1 trillion in deficit reduction by capping spending on Iraq and Afghanistan
This didn’t make sense to me for a few reasons, notably that any deal that preserves any of the Bush tax cuts should be scored by the CBO as a tax cut, which increases the deficit. The actual numbers are rather more complicated.
You can download the complete proposal here. Table S-3 (p. 57) shows the administration’s view of the world:
- Adjusted August baseline deficit of $10.6 trillion (over ten years)
- Discretionary spending caps from the Budget Control Act: $0.9 trillion
- New Obama proposals, including both the American Jobs Act and the new deficit-reduction proposals: $3.1 trillion
- Total reduction: $4.0 trillion
- Resulting deficit (over ten years): $6.6 trillion
But the weird thing is that $10.6 trillion number at the top. To see where that comes from, look at Table S-4. What they did is this:
- Start with the CBO’s current baseline deficit of $4.7 trillion, from the August Budget and Economic Outlook. Note that the $4.7 trillion does not include the $1.2 trillion of deficit reduction that will come either from the JSC or from automatic spending cuts.
- Take out the caps on discretionary spending in the Budget Control Act.
- (a) Extend the Bush tax cuts and (b) index the AMT for inflation.
- Implement the Medicare doc fix (preventing a 30 percent drop in reimbursement rates on January 1).
- That gives you a ten-year deficit of $10.6 trillion.
There’s nothing underhanded about taking out the discretionary spending caps in Table S-4 and then putting them back in Table S-3; that’s just so Table S-3 can show the totals with and without the discretionary spending caps.
There’s also nothing particularly nefarious about
#3(a) #3(b) and #4, since everyone expects those things to happen. Basically, they are just assuming some of the alternative policies that have been estimated by the CBO.
But there are some issues here. First, if they’re including the AMT patch and the doc fix in their adjusted baseline, why aren’t they including the cost savings from troop drawdowns in Iraq and Afghanistan? Those fall in the exact same category as the AMT patch and the doc fix: everyone expects them to happen, and they are in the CBO’s alternative policies. It looks like the administration is proposing an explicit cap on overseas contingency operations, which would affect CBO forecasts, as opposed to the current situation where the CBO is required to project growth at the inflation rate; this gets them $1 trillion in savings in Table S-3. At first glance, this seems like a pretty naked attempt to get credit for something that was going to happen anyway. If they were starting from the CBO baseline it would be defensible, but I don’t see how you justify adjusting the baseline for the AMT and the doc fix but not for overseas contingency operations.
More seriously, it’s not clear to me how President Obama’s proposal can count as a suggestion for the JSC. The JSC is supposed to reduce the deficit by at least $1.2 trillion relative to the CBO baseline. Obama’s bottom line is ten-year deficits of $6.6 trillion, which is higher than the CBO baseline. The biggest reason is that Obama’s $1.5 trillion tax “increase” is really a tax cut relative to current law, which includes the expiration of the Bush tax cuts. Anything that sets income tax rates lower than they were in 2000—even if those rates are higher than they are today—count as a deficit-increasing tax cut. According to Mitch McConnell, that was the whole point, since it took the Bush tax cuts off the table. Relative to current law, Obama’s proposal reduces taxes by $2.4 trillion, all of which adds to the deficit.
Now, there might be a way around this. As far as I can tell from reading Title IV of the Budget Control Act, the JSC just has to reduce the deficit by $1.2 trillion in whatever bill they come up with (see § 401(b)(5)(D)(ii); they do not have to also offset any other legislation going on in the same session. So Congress could pass one bill to patch the AMT (before or after the JSC bill), one bill to implement the doc fix, and one bill to extend the Bush tax cuts for the “middle class.” Then the JSC could reduce the deficit by more than $1.2 trillion just through the cap on overseas contingency operations and the proposed cuts to Medicare and Medicaid. But I don’t see how you get $3 trillion in “recommendations to the JSC,” since those recommendations include $900 billion from letting the Bush tax cuts expire for the rich—which the CBO can’t score as a tax increase.
Just an observation: President Obama has decided to frame his tax proposal as a $1.5 trillion tax increase on the rich (relative to current tax rates), when he could have framed it as a $2.4 trillion tax cut for the middle class (relative to current law). That’s a purely political decision, and I’m not sure it’s the right one, but his people are the experts, not I.
Finally, by assuming extension of the Bush tax cuts in his adjusted baseline, Obama has moved that item from a contestable policy choice to a fait accompli. It strikes me that no one should be happier about this outcome than President George W. Bush. Obama has basically endorsed making 80 percent of the Bush tax cuts permanent. Sure, the 20 percent for the rich was probably the part that Bush cared about the most. But it means that the core of Bush’s domestic agenda—cutting taxes and depriving the federal government of revenue—is now safe. (As far as I can tell, Obama wants to keep the lower tax rates on investment income that were in the 2003 tax cut.) As I’ve said before, it was bad policy then, and it’s bad policy now. But it will be with us for a long time.