Republicans Say “Screw You, CBO (Baseline)”

Graph above is Figure 1-2 from CBO’s long-term budget outlook, showing debt held by the public as a share 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.

Read more at Economist Mom