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Why Does Obama’s Fiscal Vision Look So Much Like Bush’s Fiscal Legacy?

March 20th, 2009 . by economistmom

The Congressional Budget Office (CBO) today clarified what the Obama Administration thinks about the Bush tax cuts (the cuts enacted in 2001 and 2003).  They’d like to keep most of them!  And they don’t seem to mind deficit financing them, which is why the extension of the “Bush tax cuts” alone, even without the added interest costs, adds about $2 trillion to the 10-year budget deficit under the Obama budget.

CBO shows that the new official, current-law baseline produces a 10-year deficit of $4.4 trillion.  This is $1.3 trillion worse than they forecast in January (see Table 1-3 on pages 6-7), due to the cost of newly enacted legislation ($1.3 trillion, primarily the recovery package) and a deteriorating revenue base (coincidentally, another loss of $1.3 trillion).  Partially offsetting those worsening factors was that lower interest rates and inflation reduce government outlays (by $1.4 trillion).  (There was another $140 billion added to the 10-year deficit due to “technical changes”.)

Incidentally, CBO’s previous (January) current-law baseline was already $1.5 trillion worse than the current-law baseline the Administration showed in its February budget documents, because CBO had already been more pessimistic than the Administration in their economic forecast.

According to today’s CBO report (see Table 1-5 on pages 12-13), relative to what’s in the books as current law, the President proposes to add $4.8 trillion to the 10-year budget deficit (more than doubling it to $9.3 trillion), in this way:

  • $2.1 trillion in net tax cuts ($1.9 trillion of which are extended Bush tax cuts, alone);
  • $1.1 trillion in mandatory spending increases, including the refundable portions of new or expanded refundable tax credits not included in the “net tax cuts” figure;
  • $600 billion in increased discretionary spending (above baseline’s assumed growth with inflation); and
  • $1.0 trillion in higher net interest costs (debt service).

So the biggest single proposal in the Obama budget contributing to the deterioration in the 10-year budget outlook is, contrary to public perception, not big spending on bailouts or stimulus or even longer-term health care reform, and not temporary tax cuts that are designed to provide immediate stimulus to the economy at only near-term cost, but rather permanent extension of most of the Bush (2001 and 2003) tax cuts–with costs that grow dramatically over time. It explains why the Obama budget (according to CBO projections) will not only fail to make trillion-dollar-plus deficits an extraordinary and temporary phenomenon (with the 2019 deficit climbing back to $1.2 trillion), but will fail to stabilize the public debt as a share of GDP (with the ratio exceeding 80 percent by 2019).

President Obama doesn’t have to feel “stuck with” the Bush tax cuts.  In fact, Congress will have to write and pass new legislation, which President Obama will have to sign, in order to keep any of the “Bush tax cuts” beyond December 31, 2010.  So now that they’re so clearly a central part of the Obama budget, it’s probably time we stop calling them the “Bush tax cuts” and start calling them the ($2 trillion in deficit-financed) “Obama tax cuts.”  But we’re still not “stuck with” them.

7 Responses to “Why Does Obama’s Fiscal Vision Look So Much Like Bush’s Fiscal Legacy?”

  1. comment number 1 by: B Davis

    President Obama doesn’t have to feel “stuck with” the Bush tax cuts. In fact, Congress will have to write and pass new legislation, which President Obama will have to sign, in order to keep any of the “Bush tax cuts” beyond December 31, 2010. So now that they’re so clearly a central part of the Obama budget, it’s probably time we stop calling them the “Bush tax cuts” and start calling them the ($2 trillion in deficit-financed) “Obama tax cuts.” But we’re still not “stuck with” them.

    I agree. It seems strange that the tax rates under Clinton, about which I heard little complaint during the nineties, seem now to be considered confiscatory. The top marginal rate was 91% when Kennedy took office and 70% when Reagan took office but was just 39.6% under Clinton. I can only hope that this current aversion to any tax increase, even if it’s just a rollback to a relatively low level, is a product of our current extraordinary economic circumstances. It should become clear when things return to “normal” that we cannot sustain these deficits. Any burden that these large deficits place on us (such as rising interest rates) will hopefully grow slowly, giving us some time to adjust. However, I think that we had better start making credible plans for how we will achieve those adjustments now.

  2. comment number 2 by: Jim Glass

    It seems strange that the tax rates under Clinton, about which I heard little complaint during the nineties, seem now to be considered confiscatory. The top marginal rate was 91% when Kennedy took office and 70% when Reagan took office

    People who invoke these olden 91% and 70% rates never mention the fact that nobody paid them. Those brackets were at such high income levels that they were all investment income, and the law back then was replete with preferences, exemptions, loopholes and tax shelters for investment income.

    For instance when Kennedy took office with the famous nominal 91% top tax bracket in place, the top tax rate on capital gains was only 25%, and the average actual effective tax rate paid on capital gains was 15%.

    When the Reagan 1986 tax reform dropped the top tax bracket for all income to only 28%, the capital gain tax preference was eliminated, so the rate on gains also was 28%, and the actual effective rate paid on all capital gains rose to 23%.

    As I mentioned before, it is an Iron Law of taxation economics that higher tax rates = more loopholes, and the people who make the most benefit of loopholes are the rich. The pressure to create loopholes increases exponentially with rate increases. So during the era of the 70% to 90% tax brackets, those with the very highest income levels had lower effective tax rates than others at lower income levels.

    And as top income tax brackets rose again post-Reagan, loopholes and tax preferences such as for capital gain income returned and started increasing again too — during 1998 to 2000 with Clinton’s higher top 39.6% tax rate, the preference for capital gain income was back and the average effective rate on capital gains was down to 19%. (Maybe that was the reason for the lack of complaint about “confiscation”?)

    Lowering tax rates of course lowers the pressure to create loopholes — so it becomes possible to eliminate them, so the rich lose the benefit of deductions and preferences.

    Which situation do you most approve: a nominal top tax rate of 91% with the richest actually paying 15%, or a nominal top tax rate of 28% with the richest actually paying 23%?

  3. comment number 3 by: Jim Glass

    “Why Does Obama’s Fiscal Vision Look So Much Like Bush’s Fiscal Legacy?”

    Possibly because politicians have a universal incentive to personally benefit by buying votes today by making spending promises without revealing the cost to taxpaying voters, while dropping that cost on a later generation to avoid ever being accountable for it.

    I mean, this is a universal incentive operating on all modern politicians — Democratic, Republican, European (even worse there!), Japanese — and the Chinese are heading for a heck of an out-year fiancing problem too. It is most definitely not just “the bad, bad, other party, not us!”, as everybody always claims.

    This is so universal and obvious that it is amazing to me that anybody — especially any self-described “deficit hawk”, but really anybody at all — could favor politicians significantly expanding any kind of government program (say “national health care” for starters) while mantaining the delusion that their politicians actually will be cost-effecitive and efficient in doing so, instead of hugely wasteful for their own benefit — until this problem is fixed first.

    Dan Shaviro, Wayne Perry Professor of Taxation at NYU Law School, has notably said that a used car salesman would go to jail for selling cars the way the politicians have sold the $40 trillion liability for Medicare to the American people. And he’s right.

    In what other area of life does total lack of accountability for those making spending decisions lead to efficient, effective spending? Do we encourage businesses and families to “feed the beauty” that way — commit to running up huge amounts of debt on spending enjoyed now without reference to cost (and which they’d probably reject if billed for it on a paygo basis, which is why we have to resort to this ploy) on the theory that later, when the massive bills come due on someone else, all will conclude that the spending was of course “worth it” all along, and be both able to pay the bills and happy to do so?

    No, of course we don’t encourage businesses and households to spend like this — but the majority of people in both political parties actually praise politicians who spend like this and encourage them to do so, on their own favored programs — which is of course the universal incentive that drives politicians of all parties in all nations to do it.

    So the problem is not in our politicians — not in our Obamas and Bushes — the problem is in ourselves.

    It is in every one of us who condemns the other party’s fiscal program, but who tolerates and indeed praises our own’s.

    BTW, being that Bush’s deficits ran at 2.2% of GDP for the four years 2005-8, while Obama plans and hopes to eventually get down to 4% to 5%, Obama’s fiscal vision is not similar to Bush’s legacy — it is at least twice as bad. And it is much worse than that considering he plans to start by running a >trillion dollar deficit in 2010 while projecting it to be a >3% growth year. Obama’s non-recession year deficits overall are promised to be worse than Ronald Reagan’s, which were by far the worse ever until now. Yet this is fine for countless Democrats who savaged Bush’s reckless 2% deficits.

    There’s only one position that combines budget hawk-dom with the demand for effective, efficient, accountable government spending — that’s to demand that every goverment program provide for its own full financing on an actuarially sound basis, with the tax increase that is needed to do so enacted from the very first day of the program’s enactment.

    Would Bush have been enable to get his Medicare drug benefit enacted if it came with a $400 billion annual tax increase? Obvioulsy not. And would Ted Kennedy have been able to get the rest of Medicare enacted as it is, if it came with a $1.3 trillion annual tax increase? Uh, rather doubtful.

    And that is no excuse for doing what both parties then did in fact, conclude: “Well, if the people don’t want to pay for it let’s enact these programs anyhow and drop a multiplied cost for them on the people of the future! Feed the Beauty!… to the cost of $40 trillion and rising annually.”

    The only response of a self-respecticing deficit hawk who wants efficient, effective, accountable government spending is to say: “If the voters who will get the benefit don’t want to pay for it, then clearly the spending is not worth it. It’s time to come up with some alternative, more efficient approach to the problem that will be worth its cost — as proven by the fact that the voters will vote to fully pay for the cost from day one.”

    Anybody who favors the contrary attitude — regardless of whether the rationale is “starve the beast” or “feed the beauty” — is part of the problem.

  4. comment number 4 by: B Davis

    People who invoke these olden 91% and 70% rates never mention the fact that nobody paid them. Those brackets were at such high income levels that they were all investment income, and the law back then was replete with preferences, exemptions, loopholes and tax shelters for investment income.

    I didn’t mention it my prior post but I have often mentioned that the top marginal rate gives very limited information about the overall level of taxes. For example, I mention this after giving a detailed description of 1986 Reagan tax cut at this link.

    As I mentioned before, it is an Iron Law of taxation economics that higher tax rates = more loopholes, and the people who make the most benefit of loopholes are the rich. The pressure to create loopholes increases exponentially with rate increases. So during the era of the 70% to 90% tax brackets, those with the very highest income levels had lower effective tax rates than others at lower income levels.

    Do you have any evidence of this last statement? The first graph at this link shows that the effective tax rates of every quintile and the upper 10, 5, and 1 percent of income earners increase as their incomes increases. This goes back at least to 1980 when we still had the 70% top marginal tax rate. Of course, we’ve all heard of isolated cases where a specific person or business paid very low taxes due to loopholes. But this has not been the case since at least 1980 for any of the broad aforementioned groups.

    And as top income tax brackets rose again post-Reagan, loopholes and tax preferences such as for capital gain income returned and started increasing again too — during 1998 to 2000 with Clinton’s higher top 39.6% tax rate, the preference for capital gain income was back and the average effective rate on capital gains was down to 19%. (Maybe that was the reason for the lack of complaint about “confiscation”?)

    The aforementioned graph shows that the overall effective income tax rate reached about the same level in 2000 as it has reached in 1981, before Reagan’s initial tax cut. Hence, the lack of complaint about “confiscation” was likely that it was a good economy and the effective tax rate was not historically that high.

    Which situation do you most approve: a nominal top tax rate of 91% with the richest actually paying 15%, or a nominal top tax rate of 28% with the richest actually paying 23%?

    Do you have sources for either of those numbers? The data on which the aforementioned graph is based go back just to 1979 when the top one percent of income earners paid a 21.8% effective income tax rate. However, it shows that the top one percent did not pay a 23% effective income tax rate until 1993, well after the Bush I tax hike raised the top marginal rate to 31% and the same year when the Clinton tax hike raised it to 39.6.

    In any event, I do think that a tax system with a top marginal rate well below the 70% pre-Reagan level but with a minimum of loopholes is preferable. For example, I can think of no really good reason why normal bank interest should be taxed at a much higher rate than capital gains. However, we need to come up with a tax system that can support our desired level of spending. We never came close to balance under Reagan or Bush but did achieve a unified budget surplus under Clinton. That may have been helped by the tech bubble but it still suggests that the Clinton levels of taxation are more sustainable than Reagan’s or Bush’s. Unfortunately, we seem to have now developed a culture under which taxes can only go down, even during a war.

  5. comment number 5 by: B Davis

    The only response of a self-respecticing deficit hawk who wants efficient, effective, accountable government spending is to say: “If the voters who will get the benefit don’t want to pay for it, then clearly the spending is not worth it. It’s time to come up with some alternative, more efficient approach to the problem that will be worth its cost — as proven by the fact that the voters will vote to fully pay for the cost from day one.”

    I believe that this is the basic idea of PAYGO and that most deficit hawks here would agree with it.

    Anybody who favors the contrary attitude — regardless of whether the rationale is “starve the beast” or “feed the beauty” — is part of the problem.

    I agree in the sense that PAYGO should apply to spending and tax cuts.

  6. comment number 6 by: Anandakos

    The problem with Jim Glass’ proposal is that it might start out flat and equitable, as did Reagan’s original 1981 plunge in marginal rates accompanied by elimination of different income classes. But IMMEDIATELY the K-Streeters start blowing holes in the principal that all income is created equal and the result will be — as it was in Reagan’s time — ballooning deficits. Reagan was man enough to recognize that revenues were falling too low and was willing to sign a corrective increase later in his term but was powerless to stop the growth of exceptions.

    Glass is right that it seems that all politicians in all countries have this tendency to spend now and pay later, either through deferred taxation or by currency devaluation. The only way to change that is to change the way they are selected.

    We need mandatory instant run off voting so that third parties have a chance, publicly funded campaigns with severe criminal penalties for nepotistic abuse of the funds, and a minimum of ten five hour debates for all Federal offices for which attendance by all candidates is mandatory and which all broadcast and non-premium cable channels must carry.

    And finally, no Senator should serve more than two terms and no representative more than six. In a nation of 300 plus million people there are more than 535 talented people at any one time. Once someone has been elected twice to the House of Representatives or even once to the Senate she or he has name familiarity and patronage power which renders defeat an almost impossible task. As a result both houses are filled with aging people who may have been dedicated to national service two decades ago but are now dedicated to their own enrichment and power. The only way to ensure that new ideas and demographics are represented is to term them out.

    I realize this would require a Constitutional amendment which would be tough to get through Congress to say the least. That is the reason that the Jeffersonians insisted on the alternative amendment process which would be necessary in this case.

  7. comment number 7 by: Patrick (G)

    The CBO didn’t really do an analysis of the carbon cap and trade revenue.

    If it had tried to estimate the revenue from allowance prices at the levels that the EIA suggested in its scoring of the core scenario of the Lieberman-Warner Climate Security Act of 2007, then I think the revenue projection would be substantially greater, nevermind the more severe scenarios that the EIA also scored.

    I’m not going to fault CBO for taking the administration’s conservative cap-and-trade estimate at face value, but I don’t think that the budget is as unbalanced as it looks.