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Republicans Say “Screw You, CBO (Baseline)”

June 24th, 2011 . by economistmom

summaryfigure1_forblog_cbolongterm_june2011

Graph above is Figure 1-2 from CBO’s long-term budget outlook, showing debt held by the public as percent of GDP under two scenarios.

The Congressional Budget Office released its long-term budget outlook this week.  There wasn’t really any new news in it, but it did serve as a reminder that the fiscal policy choices available to us can make a huge difference–from the wildly unsustainable path implied by CBO’s “alternative fiscal scenario” to the much-closer-to-sustainable (at least over the next 25 years) “extended-baseline scenario.”

Most of the difference between these two paths is explained by what happens to the Bush/Obama tax cuts.  Under the CBO’s baseline conventions, revenue levels are based on current tax law as written, expiration dates and all.  That means the baseline assumes that the entirety of the Bush/Obama tax cuts–those to the rich as well as those to the rest of us (98 percent of us or so) that make up the big group now known as “middle class”–go away as (now) scheduled at the end of 2012.  Under the “alternative fiscal scenario” (considered a “policy extended” scenario), expiring tax cuts are assumed to be permanently extended.  (Technically, the cost of extension is estimated through the next decade, and beyond that, revenues as a share of GDP are assumed to remain constant.)

This demonstrates that our choice about what to do with the Bush/Obama tax cuts at the end of 2012–whether we let them expire or we extend them (yet again)–could be the difference between a sustainable versus an unsustainable fiscal outlook.  It’s somewhat comforting that this is at least still a fairly easy policy option available to us–to just let current tax law play out.

Except politically, revenue-side options to reduce the deficit seem impossible, with the latest news about how the Republicans have pulled out of the so-called “Biden talks” over the impasse on whether revenue increases–of any sort–are even on the negotiating table.

Lately I’ve been emphasizing that not all revenue increases are created equal and hence are not all equally deserving of scorn from “no new taxes”-type Republicans.  Revenue increases that come from broadening the tax base and reducing “tax expenditures” make the tax system more efficient (by distorting economic choices less) while at the same time shrinking the size and scope of government (by reducing subsidies).  And if you raise revenue in that base-broadening way, you can afford to reduce the deficit and maybe even have some left over for marginal tax rate reduction, as was suggested by both the President’s (Simpson-Bowles) fiscal commission and the Bipartisan Policy Center’s (Rivlin-Domenici) deficit reduction task force.

So this seems a good opportunity to repeat my explanation of revenue baselines.  In all my years (during the George W. Bush Administration) working on the Democratic staffs of various committees on the Hill, the number one concept I was asked to explain was how sticking to the “current-law baseline”–which meant letting the Bush tax cuts expire as scheduled–would not be the “largest tax increase in American history.”  The short answer was because we’d already passed that tax increase; the expiration of the tax cuts to take place at the end of 2010 had been passed into law way back in 2001.  (No vote was needed to let the tax cuts expire–only to let them continue.)  The longer, more complicated answer was that sticking to current-law baseline revenue levels (as had been proposed in many of the Democratic budget resolutions throughout the GW Bush Administration) did not necessarily mean sticking to current law.  It could mean literally sticking to current law and literally letting the tax cuts expire so that we’d go back to pre-2001 (Clinton-era) tax law, but it could also mean that we might pick and choose what portion of the Bush tax cuts to extend and pay for the cost of extension by raising a perfectly-offsetting amount of revenue elsewhere.  In other words, a current-law revenue baseline is consistent with either literal current law or modifications of current law that are fully paid for (i.e., that comply with “real”, no-exceptions, pay-as-you-go rules).

Why is this distinction important to emphasize today?  Because the Biden talks have fallen apart because Republicans can’t agree to revenue increases being part of a “bipartisan” solution.  To those Republicans, it doesn’t matter that all the bipartisan fiscal commissions, task forces, and study groups have said (very clearly) that revenue increases–in addition to direct spending cuts–have to be part of any bipartisan solution.  To those Republicans, all revenue increases are created equal, and they all fit their neat little stereotype of expanding the size of government and being bad for the economy.  They don’t want to listen to the expert commissions, because they don’t want to come around to favor some types of revenue increases over others, because even if they “get it,” they don’t believe that their most influential of constituents (such as the Tea Party Movement) would understand.

And with the CBO report reminding us that revenue policy is actually the biggest fiscal policy lever we have right now–big enough to make the difference between economically sustainable and not–we might consider taking the approaches of the fiscal commissions as great examples of how any particular level of revenue can be achieved by a number of different tax policies.  We could achieve an economically sustainable level of deficits by sticking to current-law revenue levels.  But that doesn’t mean we have to let all the Bush/Obama tax cuts outright expire.  It could mean, for example, choosing to keep the lower tax rates of the Bush/Obama tax cuts but paying for the cost of those lower rates by reducing some tax expenditures to broaden the tax base.  Or it could even mean choosing to lower tax rates even below those under the Bush/Obama tax cuts but paying for that by broadening the base still further.

The CBO report shows us that the revenue side of the budget is too important to ignore in the goal of achieving fiscal sustainability.  But in highlighting the current-law baseline as one way of getting there, it emphasizes current law (with its expiring tax cuts) and probably perpetuates the “largest tax increase in American history” mentality–the fear on the part of Democrats and the vitriol on the part of Republicans.  If we could soft-focus our view of the “current-law baseline” as a goal for a fiscally-sustainable level of revenues that doesn’t have to mean raising tax rates at all, we’d more likely achieve some real bipartisanship on putting revenue policy squarely on the deficit-reduction table.

By rejecting revenue increases of any kind, the Republicans have implicitly branded the CBO current-law baseline as pure fantasy.  But they should reconsider with the recognition that current-law revenue levels don’t have to come from current law.

15 Responses to “Republicans Say “Screw You, CBO (Baseline)””

  1. comment number 1 by: Ralph Musgrave

    There is no need to borrow: any government which borrows money when it has its own printing press is raving mad (i.e. most governments are raving mad).

    And if anyone thinks that spending $X from the printing press is more inflationary than spending $X borrowed from China, perhaps they can explain why.

  2. comment number 2 by: Anna Lee

    They act as if Norquist puts a hit out on their families if they don’t walk on their knees for their masters. I say this because it seems to me that they could care less for the country. They are like a football team, fearing they won’t win, breaks all the necks of the opponents just to beat their chest and slap each others derrières.

  3. comment number 3 by: grooft

    I used MS Word’s autosummarize feature and made the 1118 words into a much more readable and understandable post. I suggest you do this in the future.

    Or you could just say “Hey Congress — Doing nothing solves the deficit problem!!!” and you might suggest to the GOP member of Congress (and their vocal supporters in “think tanks”) to quit lying about taxes and “what needs to be done to solve the deficit” and “what everyone agrees”.

    The summary:

    “Under the CBO’s baseline conventions, revenue levels are based on current tax law as written, expiration dates and all. Under the “alternative fiscal scenario” (considered a “policy extended” scenario), expiring tax cuts are assumed to be permanently extended. Revenue increases that come from broadening the tax base and reducing “tax expenditures” make the tax system more efficient (by distorting economic choices less) while at the same time shrinking the size and scope of government (by reducing subsidies). It could mean literally sticking to current law and literally letting the tax cuts expire so that we’d go back to pre-2001 (Clinton-era) tax law, but it could also mean that we might pick and choose what portion of the Bush tax cuts to extend and pay for the cost of extension by raising a perfectly-offsetting amount of revenue elsewhere. In other words, a current-law revenue baseline is consistent with either literal current law or modifications of current law that are fully paid for (i.e., that comply with “real”, no-exceptions, pay-as-you-go rules).
    We could achieve an economically sustainable level of deficits by sticking to current-law revenue levels. But that doesn’t mean we have to let all the Bush/Obama tax cuts outright expire. It could mean, for example, choosing to keep the lower tax rates of the Bush/Obama tax cuts but paying for the cost of those lower rates by reducing some tax expenditures to broaden the tax base. By rejecting revenue increases of any kind, the Republicans have implicitly branded the CBO current-law baseline as pure fantasy. But they should reconsider with the recognition that current-law revenue levels don’t have to come from current law.”

  4. comment number 4 by: Shadowfax

    Great points. The budget talks should start with the expiration of the Bush tax cuts–at all levels. That should be non-negotiable. Obama can enforce this with his veto when the time comes. Nobody wants to make a tough call before the election, so we have a lot of talk but not much action.

    Krugman has pointed out that if we want to make a debt in the deficit over the next decade, we have to do it via revenue and defense cuts, as nobody will touch entitlements for those in or near retirement.

    Cutting defense back to 3% GDP where it was under Clinton (vs. 5% today) would reduce the debt about $350 billion/year, while the Bush tax cuts are around $250 billion/year. These two steps cut the deficit about in half and should be non-negotiable from the Democrat side. Fortunately, the Tea Party zombies are on board with the defense cuts.

  5. comment number 5 by: Shadowfax

    That would be a “dent” in the deficit LOL.

  6. comment number 6 by: SteveinCH

    Sorry but this is laughable again. How about we go back to spending as a percent of GDP as it was under Clinton…18.6% or so or about $850 billion less than it is today.

    But no, it’s the Bush/Obama tax cuts (which cost a grand total of less than a third of the spending increase) that are at fault.

    The silliness of focusing on only one thing.

  7. comment number 7 by: Brooks

    Steve,

    Re: “The silliness of focusing on only one thing”

    How ironic. Just one week ago Diane posts enthusiastic praise for AARP for dropping its longstanding opposition to cuts in Social Security benefits, saying now perhaps she can be proud to be a member, and here you say it’s silly that she focuses on only one thing (and even on that “one thing” you fundementally err by invalidly lumping reductions of subsidies via the tax code in with tax rate increases as if they were the same or even similar).

  8. comment number 8 by: SteveinCH

    Brooks,

    Several issues with your post.

    1. The AARP took it back and never committed to anything specific so, as Doug Elmendorf stated in his recent Congressional testimony, “it’s hard to score a speech” (or in this case a press release). So a post lauding the AARP for saying something that they later walked back isn’t much.

    2. Diane’s post wasn’t about your favorite topic (tax expenditures), a topic you insist on inserting into every single thread, it was about the Bush/Obama tax cuts and baselines.

    3. Her argument that revenue policy is the biggest lever based on the CBO report is simply false. It’s isolating one policy choice at the expense of others. Government health care is a far larger policy choice. Heck, Medicare alone is larger than the difference in tax policies identified by the CBO. Medicare part D is larger than the amount raised by rescinding the “Bush tax cuts for the rich”.

    But, hey, let’s make the entire discussion about tax expenditures since you’ve done such a good job convincing folks through more than a thousand threads on that topic.

  9. comment number 9 by: Brooks

    Steve,

    Wow, it seemed initially that the tax expenditures topic brought out an aberration in you — one topic on which you seemed incapable of posting comments that were not consistently filled with key non sequiturs, fundamental mischaracterizations, irrelevancies, etc., but apparently there has been a lasting, carry-over effect of that habit/problem, as you are now exhibiting it here. I mean, it’s really amazing how poor the quality of your argumentation is throughout your comment above, as with so many others recently.

    Re: your point #1, that is just so obviously an absurd argument. You (implicitly, but clearly) claim that Diane does not include reductions in projected spending in her blog posts and advocacy therein. I point out that, just a week ago, Diane enthusiastically praised AARP for dropping opposition to reduction in projected spending (for Social Security). Even if one accepts your premise that AARP subsequently “walked it back”, or even if (just hypothetically) Diane had misinterpreted AARP’s position all along, the point is that she was praising an organization for (per her understanding) dropping opposition to cuts in projected spending, meaning she was implicitly (in this case) advocating some such cuts, meaning such advocacy was NOT absent from her advocacy of means of reducing our long-term fiscal imbalance, as your oblivious claim that she was “focused on only one thing” clearly implied. Get it? It’s really not complicated.

    Re: your #2, again I’ll try to walk you through logic that should have been obvious to you. You claimed that she was “focused on only one thing”. So obviously it is fitting for anyone to consider what is the “one thing” to which you were referring. It certainly seemed to be “tax increases”, including both tax rate increases and reductions in “tax expenditures” — and she DOES discuss the latter, indeed emphatically, notwithstanding that part apparently sailing over your head — as opposed to what you consider cuts in (projected) “spending”. I point out parenthetically, as a secondary (but still important) fundamental error of your argument, that even your framework of “one thing” not only obscures the very important distinction between tax rate increases vs. reduction of tax credits/deductions/exclusions (particularly for purchasing or producing specified products), but in obscuring that distinction actually confuses and undermines the very categorizations (i.e., what is more like reduction in spending vs. tax rate increases) upon which your argument is based. Yet you see my making that point as forcing the “tax expenditures” topic into this thread. How silly.

    Re: your #3, it’s irrelevant to my criticism of your comment, which had nothing to do with her characterization of the relative proportions (apparently you’re once again in “throw anything against the wall and see what some reader may think sticks” mode). See my response to your #1 above in this comment of mine. You were charging Diane with focusing exclusively on “one thing” (to the exclusion of cuts in spending), and you said “Sorry but this is laughable again”, and, since I’m familiar with the English language, the word “again” means something to me (in addition to having seen your complaint on past threads) — clearly you were not just criticizing her for focusing one only “one thing” in just her post above, but rather as a practice across previous posts of hers as well. I showed you that just one week prior she enthusiastically exhibited advocacy that directly contradicted your attribution to her of a supposedly singular focus (per your conceptually-challenged categorization). Get it? As with #1 and #2, this ain’t complicated.

  10. comment number 10 by: SteveinCH

    Wow Brooks, thanks for proving you can be a prick on other topics. Who knew ; )

    1. The substance of the claim was unsubstantiated and there was no specific proposal made. Furthermore, I think you’d find the mix of posts from Diane on raising taxes versus cutting spending highly skewed in favor of raising taxes since Diane explicitly believes that spending needs to be relatively near its current level on a long term basis. But hey, nice try.

    2. Not getting into it again. It’s your hobby horse. Thousands of posts later, it’s still your hobby horse.

    3. Yes, it is laughable to focus on the CBO report as being primarily focused on the difference in tax plans. That’s an interpretation not math.

    But I’m sure your defense secures your place in the afterlife.

  11. comment number 11 by: grooft

    Praise for AARP for suggesting that they are open to cutting social security should not be linked to “cutting the deficit”. Social Security CANNOT spend more than they have in the bank account. They are forbidden by statute from borrowing to make payments. That is why we keep talking about how “Benefits will need to be cut in [insert future date here, usually 20+years out] when the trust fund runs out”.

    Me, I will be happy to take the cut, if it turns out to be needed, WHEN THE MONEY RUNS OUT. And BTW, when the money does run out and the govt cannot pay all of what they promised, they will still pay more at that time than is being promoted by folks who want to “CUT TODAY” to save the system from being cut later.

  12. comment number 12 by: Brooks

    Steve,

    Thanks for showing just how impervious to logic your brain has become.

    Re: #1, you just don’t get (despite the fact that I broke it down into bite-size steps of logic) that it is irrelevant whether or not AARP took the position Diane attributed to it (and as an aside, my guess is that she’s much more right than you, simply on the basis of what I’ve seen from each of you in terms of accuracy of characterizations of things), let alone whether or not AARP subsequently “walked back” some such position after taking it. The point is, by praising a position she was attributing to them, she was obviously implicitly advocating such a position, and her advocacy of such a position (cuts in projected spending) directly contradicts your erroneous claim that advocacy of such a position has been absent from her advocacy. Do you REALLY not get that, despite how simple it is, or are you once again (apparently) just pretending, in bad faith, to be thick, simply in some desperate attempt to possibly save face by getting a reader or two to think some reply from you means maybe you have a valid point (which obviously you don’t). And by the way, insofar as I’ve been a “prick” with you, it’s been because I strongly suspect you’ve acted in abundance in such bad faith, thereby wasting my time and generating noise that may have made it more difficult for others to improve their understanding of an important issue.

    Re: your #2, yeesh. Nice try (ok, actually pathetic try) to make it sound as if I were trying to “get into again” with you the issue of the nature of tax credits/deductions. I gave no indication whatsoever of any interest to do so. You are simply shifting from the clear point I actually made to some straw man irrelevancy.

    3. Double Yeeeeesh. Again, you are saying something that has absolutely nothing to do with the point I made.

    Steve, I can’t be sure that you are engaging consistently in bad faith, but the alternative is that you are very consistently failing to make any sense despite sincere attempts time and time again. Both seem hard to believe, but bad faith seems the likelier of the two. Needless to say, neither is very flattering. If it’s bad, faith, although I don’t think you’re likely to stop at this point, you really should. If it’s a consistent utter failure to make relevant, logical points, you really should try harder.

  13. comment number 13 by: Jim Glass

    Praise for AARP for suggesting that they are open to cutting social security should not be linked to “cutting the deficit”. Social Security CANNOT spend more than they have in the bank account. They are forbidden by statute from borrowing to make payments. That is why we keep talking about how “Benefits will need to be cut in [insert future date here, usually 20+years out] when the trust fund runs out”.

    SS is increasing the deficit right now and is projected to forever more, as benefits now exceed payroll tax collections — the surplus years are over.

    SS has nothing at all “in the bank” other than the Treasury’s promise to pay the difference between benefits paid and payroll tax collections, until the amounts paid tally the $2.5 trillion.

    And by law it can pay this only from general revenue. So the operation of the Trust Fund will add $2.5 trillion to deficits and to the national debt (unless Congress increases taxes by $2.5 trillion to offset the cost).

    In 2025 benefits are projected to exceed payroll taxes by $200 billion (today’s dollars). That’s about 1.4% of GDP — and requires about a 15% across-the-board income tax increase to cover it, or else the $200b gets added to the deficit and national debt.

    Note that the existence of the trust fund has no effect at all on this.

    [] Without the Trust Fund, to pay promised benefits in 2025 the govt would have to either add $200b to the deficit or increase taxes by $200b (or some combination).

    [] With the Trust Fund, to pay promised benefits in 2025 the govt will have to either add $200b to the deficit or increase taxes by $200b (or some combination) — while also noting the cancelation of $200b of Trust Fund bonds.

    Trust fund or no, the exact same amount gets added to the deficit.

    I will be happy to take the cut, if it turns out to be needed, WHEN THE MONEY RUNS OUT. And BTW, when the money does run out and the govt cannot pay all of what they promised, they will still pay more at that time than …

    I wonder about the ethics of this position.

    What you are really saying is that *in spite of* the fact that SS will add more to the deficit every year, you want your full benefits — and expect those who come after you to take a 25% cut so *they* won’t add anything to the deficit.

    This even though they paid *more* taxes for their benefits than you (higher rates, bigger tax base post-1980s) and their benefits are *reduced* (later retirement age) compared to yours to begin with.

    How fair is that? What’s wrong with both you and them taking a 12.5% cut to put everyone on an equal basis for generations to come?

    “First out gets full pay, last out gets screwed”, seems a bit like a Ponzi scheme, no?

    Is this the famous “inter-generational compact” in action?

  14. comment number 14 by: Brooks

    Jim,

    I understand your desire to correct grooft’s error, but I think statements like “SS is increasing the deficit right now and is projected to forever more, as benefits now exceed payroll tax collections” serve to perpetuate a separate, fundamental conceptual misunderstanding that I think is more harmful than the error re: “repayment” of “trust funds” which you corrected.

    The misunderstanding to which I refer goes as follows, even if one avoids the “trust funds” “repayment” error that you corrected:

    1. Whether or not — or the extent to which — Social Security is contributing to projected overall deficits (i.e, our long-term fiscal imbalance problem) is a function of whether or not (or the degree to which) projected SS spending exceeds projected FICA SS revenues.

    2. Applying #1, if projected FICA SS revenues equaled or exceeded projected SS spending, SS would not be contributing at all to projected overall deficits.

    3. And if condition #2 were to exist, it would not make sense to reduce projected SS spending (via reducing benefit levels and/or eligibility) as part of the solution to reducing our long-term fiscal imbalance, because (per this argument), SS is not contributing to the problem, and reducing SS spending cannot mitigate the problem.

    4. Along similar lines as #3, it would only make sense to reduce projected SS spending if and to the extent that projected SS spending exceeds projected FICA SS revenues. Reducing SS spending any further would not make sense per point #3.

    Surely, Jim, you don’t think the argument above makes sense, correct? SS spending, like any other spending, contributes to overall deficits. FICA SS revenues, like any other revenues, reduces overall deficits. But the mere fact that SS has a dedicated tax doesn’t mean that the measure of the degree to which SS contributes to our fiscal imbalance problem is calculated as projected FICA SS revenues minus projected SS spending, any more than, say, the measure of the degree to which Defense spending contributes to deficits can be measured by, say, corporate income tax revenues minus Defense spending. It’s all just part of the whole.

    If FICA SS revenues were projected to equal SS spending forever, we could still reduce projected deficits by lowering projected SS spending. We’d probably just lower FICA SS accordingly (to avoid perpetual, growing surpluses), and raise other taxes for overall revenue-neutrality, leaving us with no net change in projected revenues, lower projected spending, and thus lower projected deficits.

    Similarly, even if there is such a “gap”, we could still pay all of projected SS spending without increasing projected overall deficits and without raising overall tax revenues. We could just shift funds from the general fund to SS to fill the gap, or we could increase FICA SS while lowering other taxes in an overall revenue-neutral way.

    As you know, all the focus on degrees of “solvency” and the “gap” is ultimately all just intragovernmental bookkeeping that has nothing to do with what is really going on or what would really (necessarily) be the effects of reducing projected SS spending or not.

  15. comment number 15 by: Gipper

    According to Diane, the Republicans have adopted the correct position. Taxes are scheduled to increase anyway at end of 2012. Therefore, it’s incumbent upon the Democrats, not the Republicans to make the concessions.

    The Democrats already have what they want — higher taxes. The Republicans need the Democrats to share the electoral and political pain by walking arm in arm advocating cuts in Medicare, Medicaid, and SS.

    It’s insane for Republicans to make concessions on taxes now……….UNLESS they agree to tax increases today that would be less than the tax rates scheduled to go into effect when the Bush/Obama tax rates expire.

    Boehner could tell the Tea Party that he’s actually lowered their long-run tax bill even if in the short-run tax rates go up. But there’s no way he’ll do that without significant cuts in expenditures.

    Diane knows this is a possible option, but Democrats like her are cynically refusing to engage in discussions about significant entitlement spending cuts because they know they’ll get what they want anyway.

    This is why the debt ceiling will be weilded against the Democrats because it’s the only bargaining power Republicans have to force the Democrats to stop their cynical game.

    Compromise requires 2 sides and Democrats have not come to the table. Hell the Senate hasn’t even passed a budget in 2 years!