Here we go again. I posted yesterday on a new TPC analysis of the tax cuts in President Obama’s proposed 2010 budget. The conclusion: Nearly everyone, even most of the very wealthy, would enjoy a big tax break. This, I suggested, was not smart, given the nation’s huge deficit and Obama’s ambitious priorities.
Not surprisingly, a commenter—AMTbuff—called me to task. While many of these revenue provisions represent tax cuts relative to current law, they are not when compared to current policy—that is, assuming all the 2001 and 2003 tax cuts are made permanent, the AMT is patched into the future, etc. According to AMTbuff, “using current law as the baseline is misleading [since] neither the public nor any experts expect all tax rates to spring back to pre-2001 levels.”
It didn’t take long for TPC’s Len Burman to weigh in. “The presumption,” he wrote, “really should be that all of the tax cuts expire.” We’ve been having this debate since Obama adopted a Bush-extended baseline during his presidential campaign—a choice that, among other things, made his proposed tax cuts look less costly than if compared to current law.
My take is somewhat different from both Len’s and AMTbuff’s. Buff sets up a straw man by arguing that no one thought “all” the tax cuts would return to pre-2001 levels. Of course not. But, neither did anyone expect “all” the Bush tax cuts would be extended indefinitely.
For instance, not a single financial advisor or Hill staffer I talked to ever thought the estate tax would actually be repealed in 2010. Hardly anyone imagined that Bush’s cuts in the top tax rates would survive his administration for long, especially once the red ink started flowing copiously in defiance of the usual, and always wrong, supply-side claims that tax cuts reduce deficits.
On the other hand, lots of folks figured other Bush tax cuts would have a much longer shelf life. It was a good bet, for instance, that Congress would keep extending the AMT patch.
Thus we are left in an analytical never-land. One could try to construct an alternative baseline based on a best guess about legislators’ intent nine years ago and an assumption of taxpayers’ beliefs today (and, btw, I’m not sure I buy the assertion that people believe today’s tax regime is cast in stone. I’ve never seen any evidence). But that exercise would only generate more arguments about assumptions and leave us with a Babel of competing "realistic" baselines.
All very interesting you say, but is the Obama plan a big tax cut or not? To answer, you need to use some baseline. And to my mind, the best of two poor choices is the law, flawed and unrealistic as it may be. Whenever possible, I use another, more straightforward, measure: How much revenue would government collect as a share of GDP and how much is it planning to spend. The President’s own budget answers that question: In 2010, he’d spend 8.5 percent of GDP more than he’d raise. The gap narrows once the economy improves, but even in 2019, it is still nearly 3.5 percent of GDP. Whatever baseline one chooses, that’s not a good thing.
