…because I’m an economist and a mom–that’s why!

A Little Joke About the Bush/Obama Tax Cuts - Part 2

August 19th, 2010 . by economistmom

No fair, “Brooks” has known me here too long and gave away the “baselines matter” punch line to yesterday’s “joke”:

“Could you loan me ten dollars but just give me five? That way you’ll owe me five, I’ll owe you five, and we’ll be even.”

Conveniently, today the Congressional Budget Office released their update to their budget and economic outlook, so I have some updated numbers for my Bush/Obama tax cuts version of that joke:

President Obama: “Could you loan me ten dollars $2.65 trillion for 10 years’ worth of all of the Bush tax cuts but just give me five about $2 trillion for the “middle-class” ones? That way you’ll owe me five, I’ll owe you five, and we’ll be even about $700 billion, and I’ll say “no problem, keep it,” and I’ll claim to have reduced the deficit by that $700 billion.

Some footnotes to that joke:

Note Table 1-7 on page 24 of the CBO report–the table showing policy alternatives not included in the CBO current-law baseline (which assumes the full complement of the Bush tax cuts–and AMT relief–expire at the end of this year).  Extension of the Bush tax cuts (EGTRRA and JGTRRA) in full costs $2.65 trillion over ten years, without counting the cost of AMT relief or any interaction with AMT relief.  In their previous Analysis of the President’s Budget, CBO said President Obama’s proposed extensions of the Bush tax cuts would cost $2.15 trillion, but that included the interaction with AMT (not the cost of extended AMT relief itself though), so I figure it’s maybe still around $2 trillion for the apples-to-apples comparison–implying the difference of around $650-$700 billion that President Obama claims to “save” by not extending the upper bracket tax cuts.

My main point in relaying this little “joke” is to say that President Obama is proposing to deficit finance (increase the deficit by) $2 trillion in extended Bush tax cuts rather than $2.7 trillion; he is not proposing to reduce the deficit relative to current law in forgoing extension of the upper-bracket tax cuts. And those figures don’t even count associated net interest costs, by the way.


And here are a few other things I found interesting in today’s CBO report:

  1. Summary Figure 1 on pg. xii: always my favorite chart, but it strikes me how it shows how far off the average revenues and average outlays are from current reality now–and how even over most of the time series going back (1970-now) neither revenues nor outlays stay that close to those averages, even though those are the historical averages!  There are pretty wild swings, and maybe the political and policy tendency is to not let the deficit get in the unsustainable range (>3%) for too long, rather than not let revenues get too far from 18% or outlays too far from 21%.
  2. Summary Figure 2 on pg. xiii:  maybe my second-favorite chart from this report, on net interest and its determinants in the baseline — it actually contains three charts (variables).  The top chart shows interest rates rising over first five years but pretty level over next five; the second shows debt/GDP rising over next couple years but then stabilizing (under baseline policies); and yet the third shows interest spending/GDP continuing to rise throughout the ten-year window.  The latter trend puzzled me at first (given the first two), but then I realized that I think it reflects what happens as the debt is rolled over, as we start rolling in higher-interest debt and rolling out (retiring) the lower-interest debt.
  3. Table 1-3 on pg. 5:  revenue growth rates are very dramatic and reflect both expiring tax provisions (”largest tax increase in American history”, baby!) and recovering economy.  I think it’s worth pointing out that only with this dramatic “catch up” in revenues do we get the more sustainable situation where revenues are projected to grow faster than outlays over the rest of the ten-year window (even if not lasting for long in terms of the longer-term outlook), allowing the gap to close to more sustainable levels of the deficit (<3% of GDP).
  4. Page 36 in the economic outlook chapter:  This provides a very clear illustration of how CBO’s alternative fiscal scenario, where most of the Bush tax cuts (the ones Obama proposes) are extended, would increase GDP level and growth over the baseline forecast but only in the first 2-3 years of the window.  It underscores how the economic effects of deficits differ in the short-term vs. longer-term–why deficits (and deficit-financed “stimulus”) may be helpful now but harmful if they persist beyond the next couple years–and hence why the current weakness in the economy does not justify permanent deficit financing of even Obama’s “middle-class” portions of the Bush tax cuts (which are the only portions CBO now includes in their “alternative fiscal scenario”).

…which brings me to an important fiscal policy lesson (”teachable moment?”) to the Obama Administration and Congress that comes out of the CBO report: the current-law baseline shows us a path (not the only path, but at least a path) to sustainable budget deficits within the ten-year window.  We don’t literally have to stick to current law to get there, but we need to stick to PAYGO (without exemptions) relative to current-law revenue and spending levels to get there.  We need to literally pay for things as we go along, including paying for continued policies, if those policies aren’t already continued under current law.  And if we can’t or aren’t willing to pay for extending these policies, then perhaps we shouldn’t extend them–especially when it doesn’t make economic sense to extend them.

11 Responses to “A Little Joke About the Bush/Obama Tax Cuts - Part 2”

  1. comment number 1 by: SteveinCH

    Nice post Diane…two comments.

    1. The CBO baseline (even with Bush tax cuts extended and the AMT patch kept) gets revenue as a percentage of GDP back up to around 19 percent by 2020. The issue therefore is how much above that we want to/need to go. Returning revenues to their historical levels is a complete no brainer. We would have to cut taxes from current policy levels to avoid getting back to historical levels of GDP. The barrier relative to historical averages is and remains spending levels well above any historical norm. We can argue whether this is good or bad but ignoring that fact (or making it a subpoint of a larger point on balance) doesn’t do justice to what we know about what is going on here.

    I’d also point out that flat spending to GDP ratios reflect the argument that government should do no better than constant returns to scale. Certainly, over long periods of time, we should require more than that.

    2. On one level I agree with you about 2-sided PAYGO but perhaps you missed the post where you (and Concord) supported the bastardized version that was passed on the grounds that it was better than nothing. I maintained then and still maintain now that it was worse than nothing for exactly the dilemma that is now created. We’ve taken the completely stupid process we have (trust funds, GSE accounting and all) and now added a level of things that “count” and “don’t count” in the context of PAYGO.

  2. comment number 2 by: Brooks


    I’d ask “What do I win?”, but then there might be a tiny chance you’d bluff with “a beer”, not knowing that I’ll be in D.C. on Monday…so I won’t ask.

    I’ll be content with my half credit for getting it right but knowing EconomistMom too well.

  3. comment number 3 by: Hal

    The fact is that SS is already bankrupt! At 60 I have no reasonable expectation of receiving anything. The only real solution is that what needs to be done is exclude everyone making over $60,000 a year. In addition raise the age of retirement to 70. This would allow the taking care of the poor who could not put aside for their retirement but would also require them to work longer to receive benefits. I would also eliminate the program for those born in the year 2000. They are not paying into it and the program needs to go away by or before the end of the century. Those born in and after 2000 should have a choice of contributing to some form of mandatory retirement that will in fact be their own and not a governmental program. That way this drag on the economy and government will be out of the social net business and get out of entitlements. This was never the proper function of government. In order to help the program in the short time, the Federal budget could have several non vital departments eliminated such as the EPA, IRS, Dept. of Education to name a few and have that money go to SS. The IRS would not be needed when we go to the Fair Tax and dump the regressive income tax.

  4. comment number 4 by: AMTbuff

    Any tax system that takes more than 10% of GDP will require an enforcement agency the size of today’s IRS. Tax systems which are inherently defective will require even more.

  5. comment number 5 by: JB

    Love the article.

  6. comment number 6 by: FatSean

    I’m saddened by my parents’ generation. I’m in my 30s and I see a bunch of self entitled old people who want want want but when it came time to sacrifice during the “rich times” to keep programs solvent…they fell for the siren call of “tax cuts to sustain growth.”

    Simple facts are we need to spend less. Start with the military.

  7. comment number 7 by: FatSean

    Also, we have seen that we cannot trust private sector investment groups for our retirement. I will fight any law that forces me to invest in the private sector. If I’m going to be forced to save for my retirement, I want the government in control.

  8. comment number 8 by: Sweet Lou


    Summary Figure 1 on pg. xii was MY favorite long before everybody else was into it.

    Summary Figure 2 on pg. xiii used to be ok, but hasn’t done anything worth listening to since its first album. Only lamesters list Summary Figure 2 on pg. xiii as one of thier favorites.

    Right now, I am into Table 47 on pg. ccx. It’s probably a bit too nuanced and sophisticated for you, though.

  9. comment number 9 by: Paul Martin

    I think you said something important. i just wich i knew what it was

  10. comment number 10 by: Dan

    This article is the joke because it completely ignores the historical record on tax cuts! (Wiki: Laffer curve) - Every significant tax cut we’ve tried since WW2 has more than paid for itself with increased revenues. Contrariwise, every tax increase has resulted in fewer revenues than anticipated because it takes money out of the private sector that would otherwise be able to create tax-paying jobs and stimulate the economy.
    We need to cut spending and shrink the government.

  11. comment number 11 by: Anandakos


    Not EVERY tax cut.

    Even Saint Ronnie realized he had gone too far with the 1981 spree. In 1984 he and Stockman increased revenues by eliminating write-offs.

    And of course it is absurd to assert that Prince Hal’s tax cuts of 2001 and 2003 paid for themselves. FY 2001 (Clinton’s last budget) was slightly in deficit because of the recession after the tech blow up. By 2003 the deficit was five times larger. Entirely because of the tax cuts.

    Grant, revenues DID rebound between FY 2003 and FY 2008, but anyone with a shred of honesty and good sense recognizes that it was a result of the ponzification of homeownership, not genuine economic growth.

    Yes, the Democrats have to take a certain amount of blame for inventing Fannie and Freddie, who invented mortgage securitization. But they did not go one tenth as crazy with it as Golden West and the like. By mid-2007 it was clear for all to see that major mortgage lenders were nothing more than confidence games. “Which shell is the pea under? (rattle rattle)”