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The Biggest Banana Peel in the Congressional Budget: “The Largest Tax Increase in American History”

May 22nd, 2008 . by economistmom

UPDATED AGAIN Thurs. 5/22:  UPDATED late Wed. 5/21:  Be sure to tune into the House floor (C-SPAN) sometime tomorrow (Wednesday) Thursday (it was pushed back) to see It’s now being reported that the vote on the House-Senate conference agreement on the FY2009 budget resolution will not happen until June, due to a procedural glitch in the farm bill.  The Senate will vote is also expected to vote on Thursday.   Too bad, as I thought you’d hear more today about “the largest tax increase in American history,” which surely has been the biggest “banana peel” in the congressional budget process over the past two years.  I use “banana peel” in the “distraction” sense, referring to my personal mishap over the weekend when I made the mistake of picking up the banana peel.  You could also think of it in the more traditional, “slipping up” sense.  (Gee, maybe the farm bill “slip up” is now the biggest banana peel in the budget process…)

The “largest tax increase in American history” is the affectionate term used to describe how the House-passed resolution stuck to revenue levels that correspond to official CBO baseline (current-law) revenue levels.  I’ve spent many hours trying to explain what that means to both members of Congress and ordinary people, but the shortest explanation is that these are the same levels of tax revenues that would be achieved if Congress shut down and went home for the next few years, so that no new tax laws were passed.  The “largest tax increase” in history is actually already scheduled to take place under current law, because some of the “largest tax decreases in American history” (the tax cuts passed in 2001 and 2003) are scheduled to expire at the end of 2010 under current law

Why do I consider this the biggest banana peel in the congressional budget?  Because it’s a major distraction of politics over policy, for both political parties.

For Congressional Republicans, the rhetorical line is so irresistable that they have gotten completely distracted away from having the chance to make their case for the large, deficit-financed tax cuts they are implicitly proposing.  They are arguing against a huge tax increase, rather than arguing for a huge tax decrease.  The Republicans are also distracted away from elaborating on the ways that they’d reduce the deficit through the spending side rather than the tax side.  And they are distracted away from talking about the longer-term need for entitlement reform and tax reform–topics I know they like to talk about.

For Congressional Democrats, the rhetorical line is so aggravating that they have gotten completely distracted away from making their case against the large, deficit-financed tax cuts that the Republicans are implicitly proposing.  The Democratic response has been purely defensive; they point to the fact that their pay-go compliant revenue policy only sticks to the plan under current law–that the budget resolution does not and cannot change tax law.  Thus, they accurately (but narrowly) point out:  the budget resolution does not raise taxes by one penny.  They fail to respond in the way I have only dreamed about (…you’re darn right it’s the largest tax increase in American history!), that would boldly argue that deficits matter, that tax cuts don’t pay for themselves, and that there are many ways to raise revenue that don’t involve inefficient increases in marginal tax rates (see many other previous posts).  (Democrats can look good talking about entitlement and tax reform, too.)

For both sides, the rhetoric has been so engaging that it led to most of the sticking points in the negotiations on the budget resolution–which were mostly over revenues and whether tax cuts should be deficit-financed or made to comply with pay-go rules (allowing the “largest tax increase in American history”).  After the ultimate, exhausting demise of pay-go in last year’s extension of AMT relief, this year the Blue Dogs (bless their hearts) were trying one more way of getting pay-go-compliant tax relief into the budget resolution, by using reconciliation.  After the Senate wouldn’t go along, the Blue Dogs (bless their hearts) did their best to negotiate a minimum-acceptable semblance of fiscal discipline in the conference agreement.

Now, I think the conference agreement is a pretty ugly mess (more explanation later this week), but those of us who support fiscal responsibility have to admire the budget committees’ and House and Senate leadership’s valiant effort to come to agreement–and that a congressional budget resolution will indeed be passed, for the second year in a row, and in an election year.  Not an easy feat.

Still, please remember as you watch the floor debate that that “largest tax increase in American history” is just a gigantic banana peel.   And dream about next year when maybe we won’t be so distracted and can turn our attention to the real and critical budget policy issues.

5 Responses to “The Biggest Banana Peel in the Congressional Budget: “The Largest Tax Increase in American History””

  1. comment number 1 by: Jeffrey

    Interesting editorial in the WSJ yesterday by David Ranson titled “You Can’t Soak the Rich”. I’ll paraphase.

    1) He outlines a Hauser’s Law which states that tax revenues as a % of GDP has remained remarkably consistent at around 19.5% since the end of WWII. This despite marginal rates going from 90% to 35% over that time period.
    2) Why would this be? Per the Laffer Curve, as tax rates decline people increase work, report more income (less beneficial to shelter income), and invest more. Raising rates have the opposite effect. Put another way, capital flows to where it’s wanted.
    3) So how do we increase revenues? Increase GDP. Lower taxes fosters growth. I’ve yet to hear where higher taxes foster growth.

    Since tax revenues are so responsive to the myriad effects tax rates have on behavior, maybe our efforts would be better served by focusing on what we know we can save i.e. reduce expenditures (like agricultural subisidies, etc.).

    Maybe our “banana peel” moment is not to focus on all the details to the detriment of the big picture. Let’s keep the economy growing and focus on reducing expenditures; something more in our control than people’s behavior.

    One final note. I understand current law has the tax cuts expiring. But how is that not a tax increase? Under current law, if today my after tax return is X and tomorrow it is X-1, how is that not a tax increase?

  2. comment number 2 by: economistmom

    Jeffrey: Funny you should highlight this. Go visit the Capital Gains and Games blog:

    http://www.capitalgainsandgames.com/blog/andrew-samwick/329/beyond-awful-wall-street-journal

  3. comment number 3 by: Ernie

    So, the “largest tax increase in American history” was actually part of the tax cuts passed in 2001 and 2003, since those tax cuts were intentionally scheduled to expire. And, those that voted for the tax cuts also voted for the tax increase. Seems like the correct way to look at this, even though it’s a distraction.

  4. comment number 4 by: Ann

    To follow on Ernie’s comment, if you’re going to say those that voted for the tax cuts also voted for the tax increase, you must also agree that those who voted to increase SCHIP for the next five years also voted to cut it to the bone in the sixth year. And those that vote for the doc fix also vote to cut reimbursements drastically in the future.

  5. comment number 5 by: B Davis

    Jeffrey: Funny you should highlight this. Go visit the Capital Gains and Games blog:

    Yes, there are a number of serious problems with David Ranson’s op-ed. The chart compares the top marginal income tax rate with the revenue from all federal taxes. These numbers are simply not comparable. One must either compare the top marginal income tax rate with the revenue that come from that rate or compare the effective tax rate of all taxes with the revenue from those taxes. As the revenue figures for the former are not available to my knowledge, I’ve done the latter. Comparing the effective tax rate of all taxes with the revenue from those taxes reveals a very close positive correlation. That is, the effective tax rate and the corresponding revenue tend to go up and down together by similar amounts. This correlation likewise holds if one looks at individual income taxes. I have posted a graph of these numbers and a discussion of the op-ed at http://usbudget.blogspot.com/.