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The Candidates’ Tax Plans: Revenue Neutrality Is Hard To Do

June 11th, 2008 . by economistmom

The Tax Policy Center (via their TaxVox blog’s Howard Gleckman) has delivered their first installment of bad news to the Obama and McCain economic teams:  they’ve got their work cut out for them if they want to be both tax cutters and deficit hawks.

On Obama’s (not-quite) “bottom line” (the calculation does not include a big potential offset from an increase in the maximum income subject to Social Security taxes):

Obama’s generosity [toward the middle class in tax cuts] comes at a price, however, He’d raise the national debt by a staggering $3.3 trillion over the next decade, and that includes more than $900 billion in promised revenue raisers that TPC could not verify.

On McCain’s “bottom line” (regarding taxes, so not including the potential deficit reduction he’d accomplish via spending cuts):

Keeping to the pattern of Bush-era Republicans, McCain would also go deeper into the red than Obama. Including interest, he’d increase the national debt by $4.5 trillion over a decade.

Howard/TaxVox ends with a caution about revenue baselines:

Finally, a quick word about baselines. Both McCain and Obama insist that we should assume that the Bush tax cuts will be made permanent before estimating what their own tax cuts will cost. This is little more than an outrageous bit of accounting legerdemain. There is, in fact, zero chance that all the Bush tax cuts will be made permanent, just as there is no chance they will all be allowed to expire.

I’d like to put a sharper point on that warning on revenue baselines.  The revenue baseline that matters for legislative purposes and complying with the pay-as-you-go (PAY-GO) rules is not the revenue path that is most likely to occur (and Howard is right that either extreme is highly unlikely)–but the revenue path that would be achieved under current law.   Current law says all of the 2001 and 2003 tax cuts expire after December 31, 2010.  That means that for pay-go purposes, letting some of the tax cuts expire in order to “pay for” the tax cuts you want to extend (Obama’s general strategy) is not really paying for it at all.  Such a strategy would not technically be a revenue-neutral or deficit-neutral one, but a revenue-losing, deficit-increasing, pay-go violating, one (albeit, less of one than if you’re not willing to let any of the tax cuts expire, a la McCain).  So if Obama is as committed to complying with pay-go as he is saying he is (as I am hoping he is), he will indeed have to embrace some of those tax increases, such as the increase in payroll taxes paid by higher-income Americans, that Howard calls “extremely controversial.”

They say that revenue neutrality is hard to do, and I’m afraid we’ll soon see that that’s oh so true.

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