The Bush (and Obama) Tax Cuts

One of the things we read all too often on the web is about the gross revenue impact of the "Bush tax cuts."  It's so often said that we pretty much all accept it as a reality.  The point of this post is not to defend the tax cuts of 2001 and 2003 but to try to put them in some type of context.

To start, let's note that the tax cuts of 2001 and 2003 are considered relative to the baseline of not passing them.  Fair enough.  The CBO did an assessment of the impact of these tax cuts and concluded that between 2002 and 2011, the impact was a shade over $1.5 trillion.  Between 2001 and 2009 (fiscal years), the impact was about $1.2 trillion.  It seems very fair to say that the "Bush tax cuts" cost the Treasury between $1.0 and $1.2 trillion.  That's a lot of money for sure.

But, during the course of refuting someone who told me the Bush tax cuts had cost $10 trillion, it occurred to me to look up the cost of the "Obama tax cuts."  In that camp, I'd include the following

• The $700 billion of cost in continuing the Bush tax cuts (which expired on 1/1/2010) until 2012.
• The roughly $180 billion cost of the payroll tax holiday
• The $1.2 trillion cost of continuing almost all of the 2001 and 2003 tax cuts through President Obama's second term.
• The $250 billion in tax cuts that were in the ARRA

In total then, President Obama has cost the Treasury (using the same baseline as for the Bush tax cuts) on the order of $2.3 trillion during his two terms versus about half that amount for the dreaded "Bush tax cuts."

Please do not interpret this as a defense of the Bush tax cuts, just an attempt to put them in context.

A Very Weak Argument About the ACA

This post from Ezra Klein exemplifies the type of argumentation that will be used by the administration to encourage the young to make bad financial decisions around health insurance, a decision on which the entire ACA edifice appears to rest.

Let me just offer a few observations (from the comment I left in response to the post).

Clancy is wrong: The subsidies are funded by taxes on rich people and by cuts to Medicare spending, not by the premiums paid by young people. In fact, young people are likely to be the biggest beneficiaries of the subsidies because they’re more likely than any other age group to be poor and uninsured.

Right and so wonderfully deceptive at exactly the same time.  Yes, in point of fact, the young will disproportionately receive subsidies because, of those not covered by Medicare, they are disproportionately poor.  But that fact misses the larger point.

Even with subsidies, many of the young will wind up paying far more for insurance than the insurance is worth to them on an actuarial basis.  This is because the ACA has set a community rating cap at 3:1, far below the 5:1 that was prevalent before and even further below the real actuarial values.

The trick to making any health-insurance system work is to attract enough healthy and young people into the insurance pool.

 

Same fallacy again.  This is only true with community rating, at least to the degree that is required under the ACA.  Without community rating, this isn't true at all.  In other individual insurance markets, cars and life for example, this is not true.  It is the provision of the ACA that drives this not a necessary condition of insurance.

The number of young people who make too much money to qualify for subsidies but don’t receive health insurance through their jobs is pretty small (and also not easy to pinpoint).

 

Deceptive again. The statement is true but irrelevant.  Qualifying for (any) subsidy does not make insurance a good financial decision.  That's the implicit logic in this point and the logic is false.

And Obamacare is intentionally structured to prevent people who go without insurance from acquiring it only after they need it. You can only sign up for health insurance during an annual open-enrollment period

 

One more deception.  The statement is true but not relative.  Today, if one gets a "pre-existing condition," one may not be eligible for insurance ever (in the individual market).  The ACA dramatically reduces this risk (and therefore the amount a rational person should pay to avoid it).  Guaranteed issue makes insurance less valuable not more.  In other words, this is exactly the opposite of what is claimed.

Young people grow old. Healthy people get sick. Rich people become poor. The people overpaying to keep costs low today are the people underpaying 10 or 20 years from now. It’s a terrible mistake to believe your health-care needs won’t change over time.

 

Continuing exactly the same line of fallacious argument.  The ACA allows those people to buy the coverage 10 or 20 years from now no matter what at a better actuarial value than they will received today.

The only question is whether you’ll have insurance when it comes.

 

The short story here is that the ACA eliminates the things that allow for cost control in insurance and pays for them by imposing a hidden tax on the young.  That's quite disingenuous as an approach and Mr. Klein's defense is quite weak.  And yet, having young people buy this argument is exactly what the ACA depends on.  Isn't it a bit sad that the government is dependent on encouraging people to behave in financially irresponsible ways in order to implement policy.
                                   

A Question for Zandi and Blinder

Back in the days of the ARRA debate, a great deal was made of a study by Mark Zandi and Alan Blinder that described the effects of the stimulus using a complex economic model.   I don't want to renew the whole stimulus debate but a post on a different topic caused me to dust off the Zandi/Blinder paper and look at some of the forecasts for GDP that were in the model.

Here are five interesting numbers for you.  The first four are forecast GDP in 2012 (in $2005 dollars) according to the model.

No policy response (no fiscal or monetary policy) - $12620
Monetary stimulus (no fiscal policy) - $14216
Fiscal stimulus (no monetary policy) - $13774
Both fiscal and monetary stimulus - $14552

Actual GDP in 2012 - $13593

In other words, the GDP in 2012 was nearly 7% smaller than was predicted by the Zandi/Blinder model in 2010 and indeed was nearly 5% smaller than predicted by the model in a world where the stimulus never happened.  These are large differences to be sure and in a very short period of time.

My question for the authors is "why?"

A couple of answers occur to me. 

1. Fiscal and monetary policy were far more restrictive than envisioned by the model for 2011 and 2012.  While possible, this seems highly unlikely because smaller deficits were forecast for 2011 and 2012 in 2010 than actually occurred.  To the degree the authors were using public data, they would have assumed more austerity on the government side than actually existed.
2. The model's long term effects are either flawed or undermined by exogenous factors.  Again, while this is possible, it seems unlikely, particularly given the magnitude of the observed differences.
3. The model isn't very good and its conclusions are suspect.  In the absence of an alternative, this seems the most likely answer.

I'm quite sure I'll not get a reply from the authors but it just goes to show that periodically checking on the predictions of models is a good way to think about validating them, albeit it's often after the smoke of the debate has cleared.

The Timing of Savings

Several commentators have made the point that the President's budgetary savings are back end loaded.  I wanted to test this theory so I calculated the savings in each budget relative to the CBO baseline and the percentage of the savings that come in the first 5 years of the budget versus the second five years.  Frankly, it doesn't make much of a case for optimism about any of the forecasts.

First to set a baseline, let's determine the percentage of spending that comes in the first five years versus the last as a reasonable expectation of how the savings "should" come.  Using the CBO baseline, we get that 43.1% of the spending in the CBO baseline occurs in the first five years so a reasonable expectation is that 40 percent or so of the savings should come in the same time period.

So how do the different budgets do?  The Ryan budget comes closest to our 40 percent benchmark

In the Ryan budget, 32% of the savings come in the first five years.  In the Murray budget, the number is far lower, at 14%.  But the worse by far is in the President's budget where negative 9% of the savings come in the first five years, meaning the President's budget actually adds more to the debt over the next five years than is planned to be the case in the CBO baseline.

A budget that says more than 100% of the pain will come after you've left office isn't much of a budget at all.

Why Our Way of Discussing Budgets Must Be Reformed

The following appeared in an article at The Hill online

Republicans are betting that the public will be receptive to the Ryan plan’s measures to balance the budget in just 10 years, through lowering tax rates, $5.7 trillion in spending cuts and a repeal of the president’s healthcare reform law. 

 Of the three claims, one is partially true but misleading, one is false (in any reasonable world) and one is true.  The last one is true...the Ryan budget does repeal the President's health care law but the other two are misleading at best and false at worst.

First the misleading part...the lowering of tax rates.  Yes, the Ryan plan lowers tax rates and balances that with limitations on or eliminations of deductions in the current tax code.  Leaving aside my point of view on Ryan's tax plan, we should be able to agree that the average person, reading the words "through lowering tax rates" could be forgiven for assuming that Ryan plans to reduce government revenues to some degree.  Of course, as I've pointed out, this simply is not the case.  The Ryan plan proposes to increase government revenues by an average of 6.2% per year for the next decade.  It may well be that we should increase revenues more (as other budgets have proposed) but it is certainly not the case that Congressman Ryan has proposed cutting revenues.

Now the false part - $5.7 trillion in spending cuts.  There are no $5.7 trillion in spending cuts in the Ryan budget.  The budget proposes growing spending by 3.4% per year on average for the next 10 years.  Perhaps, some day we will realize that we can't grow spending by 3.4% per year while cutting it by $5.7 trillion.  Clearly today is not that day.

A Budget Comparison

Now that the House and Senate have passed their respective budgets, I thought it might be useful to do a comparison, at a high level, between the budgets.  The chart below provides a very simple way of looking at the budgets in aggregate, a level that is appropriate, given how unspecific budget resolutions tend to be.

Let's start with the spending side of the equation.  The CBO baseline has spending growth at 5.3% per year from 2013 to 2023.  The Ryan budget is at 3.4% per year and the Murray budget is at 4.8% per year.  All of these are higher than the projected rate of growth of inflation plus population.  Thus, real government spending per capita will increase under each of these budgets.  For example, under the Murray budget, real spending per capita grows from $11,229 in 2013 to $13, 697 in 2023.  In other words, even after accounting for the growth of inflation and population, the Murray budget spends about 20 percent more per person by the end of the 10 year period.

On the revenue side, the budgets are all pretty close.  The Murray budget increases taxes more than the Ryan budget (which basically duplicates the CBO baseline).  But again, all budgets grow spending far faster than GDP, meaning government revenues will expand faster than the growth of the economy.

What is interesting from my perspective is the 2.1 percentage point gap between GDP growth and forecast inflation plus population growth.  As I have discussed before, that gap is our budget opportunity.  A budget that grows spending at the rate of inflation plus population, while growing revenue at the rate of growth of GDP will always balance.  For example, starting from our forecast position in 2013, a budget designed along these lines would balance within 15 years, not quite as fast as the Ryan budget but a lot faster than anything else that has been proposed.

Another Silly NYT Editorial

One can always count on the New York Times editorial board for misleading commentary on matters budgetary.  Here is their latest installment. 

First, we have the customary dipsy doodle on tax expenditures, as if they were actual expenditures

Tax breaks work like spending. Giving a deduction for certain activities, like homeownership or retirement savings, is the same as writing a government check to subsidize those activities. Functionally, they mimic entitlements. Like Medicare, Medicaid and Social Security, they are available, year in and year out, in full, to all who qualify. Yet in budget talks, Republicans ignore tax entitlements, which flow mostly to high-income taxpayers, while pushing to cut Medicare, Medicaid and Social Security.

Giving a deduction is not the same as writing a government check unless one posits that the taxes necessary to write the check would come only from the person who received the deduction.  The fact that you can structure two things to accomplish the same task does not mean they are the same thing.  To take a very trivial example, I can use sunlight or burn natural gas to heat a substance but that does not mean that they are the same thing.

In accounting terms it's the difference between a counter (or contra) credit and a debit.  Although they have the same effect on net worth, they are not the same thing.  But this is the norm for those who favor higher taxes.  If we can equate higher taxes with lower spending, maybe we can confuse the masses enough to get what we want.

But that part is normal for the Times editorial board and is really an irreconcilable difference of opinion.  What's more annoying is the juxtaposition of two things.  First, we have a general description of the size and scope of tax expenditures.

Each year, the government doles out tax breaks worth $1.1 trillion. That is more than the cost of Medicare and Medicaid combined. It is more than Social Security. It tops the defense budget, and it tops the budget for nondefense discretionary programs, which include most everything else.

To get to the $1.1 trillion, one needs to include personal and corporate tax breaks, envision a tax code where capital income is taxes like wage income (which has never happened but maybe should).  The comparisons are tailored...as an example Medicare and Social Security taken together are larger than $1.1 trillion per yer and yet the Times ignores that comparison. 

But the editors follow this up with three examples of tax expenditures: Carried Interest, Nine Figure IRAs, and Like Kind Exchanges.  Of these three, the Times says carried interest costs the Treasury $13.4 over a decade or $1.3 billion per year.  Otherwise know as 0.1% of total tax expenditures.  Like Kind Exchanges cost the government $3 billion a year (or 0.3%) though the editors claim "...the amount could be much higher."  As for nine figure IRAs, the Times only says "[n]o one knows how much tax is avoided this way."

So to review, equate tax increases with spending reductions, quote a really big number to establish how important this is and then cite specific examples that account for less than 0.5% of the number.  I do wonder sometimes how things like this make their way into one of the nation's leading newspapers.

Misplaced Priorities and Wasted Time

Let's turn to the Republican budget from Congressman Ryan and the House Budget Committee.  At one level, based on my prior posts, one could think I'd be supportive of the Republican budget.  But, I'm not, at least not at any level beyond principle.  At the level of principles, tax reform is a good idea and the budget should be balanced by cutting spending, I find myself in line with the budget.  But beyond that level, I'm almost entirely misaligned.

In particular, there are four problems I see with the Ryan budget.

1.  Obfuscation - nowhere in the Ryan budget are there numbers comparable to the CBO numbers to allow for easy comparison between the Ryan budget and the CBO baseline.  This is a substantial issue for those who would like to have comparability between numbers.

2.  Military spending - the Ryan budget clearly increases "base" military spending, that is military spending less OCO spending.  In the Ryan budget, total defense spending looks to be roughly in line with the CBO baseline but this conceals a switch between "base" spending and OCO spending.  In other words, looking at only base spending, the Ryan budget proposes spending more than the CBO on defense.

3.  Entitlements - within the budget window, the Ryan budget does relatively little to address entitlements other than ending the spending associated with the ACA.  Medicare spending (net) is about $100 billion less over the 10 year period and social security spending is exactly the same as in the CBO baseline.  Thus, more than half of manageable (ex-interest) government spending is spared from any spending restraint.  As a consequence of this, Ryan is forced to make very difficult reductions in spending on the poor, a very bad tradeoff in my view.

4.  Taxes - Ryan continues to advance ill thought out and ill defined tax plans in his budgets.  The 10/25% rate and I'll figure out the $5 trillion plus of tax increases later argument is old, tired, and unnecessary.  Ryan could simply content himself with the notion of revenue neutral tax reform and leave it at that.  The tax plans have no impact on the budget whatsoever and thus are nothing more than wasted time in the discussion.  Tax reform will or will not happen in the future.  Offering some specifics without all of them causes much more trouble than it is worth.

So all and all, the Ryan budget is deeply disappointing, particularly since a budget that asked a little more of defense and spending on the elderly and ignored the tax discussion would have been a better answer and might have been more defensible, at least for those willing to engage in the debate.

Adjusting the Baseline and Changing the Message

This week saw the drop of three major budget proposals, from House Republicans, Senate Democrats, and the Congressional Progressive Caucus.  They are all bad for various different reasons.  And in particular, they are bad at the way they represent the numbers in their descriptions.  Each plays fast and loose with "the baseline" and various other definitional elements to make comparisons that are deceptive at best.

I'll be making several posts about the various budgets over the next couple of days.  I want to start with the "centrist" budget, the one from the Senate Democrats.  One major issue is the adjustment of the baseline to create false impressions.

From the Senate Budget,

Achieves $975 billion in deficit reduction through responsible spending cuts made across the federal

budget: 

• $493 billion saved on the domestic spending side, including $275 billion in health care savings
  made in a way that does not harm seniors or families. 

•   $240 billion saved by carefully and responsibly cutting defense spending to align with the
  drawdown of troops in our overseas operations. 

• $242 billion saved in reduced interest payments

Well, that's about 0 for 3 in terms of accuracy.  If we look at the CBO baseline, the Senate budget spends $197 billion less on interest ($5213 billion versus $5410 billion), $41 billion less on domestic discretionary spending ( $6356 billion versus $6397 billion), $626 billion less on defense ($5829 billion versus $6455 billion), and $26 billion more on mandatory spending ($28964 billion versus $28938 billion).  So if we restate into the categories used by Senator Murray and use the CBO baseline versus the one the Senator invents, we get:

• $15 billion less on the domestic spending side
• $626 billion less on defense spending
• $197 billion less on interest payments
• Total spending reductions of $838 billion

In other words, relative to the CBO baseline, it's a typical Democratic plan on spending...cut defense spending and leave everything else alone since any savings in interest payments are the result of tax increases or defense spending reductions.

At a macro level, the Senate budget is more accurate on taxes, claiming $975 billion in tax increases when, in fact, there are only $923 billion in tax increases.  But beyond describing ways the savings might be attained, the Senate budget proposal is silent on how these tax increases will be created.  In fairness, this is the same critique that is leveled against the House Republican proposal at a multiple of the size of tax increases required.

It is not the case however that the Senate budget increases taxes by $1.5 trillion as reported at the Heritage Foundation or National Review.  Yes, the budget contains discussion of replacing the sequester and other things but it does not include those things in the budget and thus it is, in my view, incorrect to claim that the budget increases taxes by more than it actually does.

So to restate, versus the CBO baseline, the Senate budget

1. Increases taxes by $923 billion with no specification as to where those increases will fall
2. Decreases spending on the military by $626 billion.
3. Gets the rest of its spending reductions from reduction in interest related to the two above factors

Hardly a "balanced approach" but entirely consistent with normal democratic priorities.

The lesson here is whenever you see a budgeter building a "bridge" from the CBO baseline to one they say represents "current policy," get ready for some quick spinning.

Another Way of Looking at the CBO Forecast

You wind up reading a lot of these days about budget cuts.  Indeed, in yesterday's New York Times, you had Steven Rattner making the claim that the President and Congress had already introduced trillions of dollars in spending cuts.  Using a chart from the CFRB, Mr. Rattner argues that, including the sequester, we have already had $2.8 trillion of spending cuts.  And yet, as I have noted in the past, the rate of growth forecast in the budget is 5.3% over the next 10 years.

As the same time, the President likes to talk about the need for "a balanced approach" by which he means more spending and more taxes than are already projected.  So let's look at the projection.  What's below is the CBO forecast expressed in real per capita terms using the census forecast of population and the CBO forecast for inflation.

In real, per capita terms, spending growth over the forecast average 2.5% and that's after the spending reductions in the BCA and the sequester.  Over the same period, revenues grow by 3.4% per year.  So Mr. Rattner's claim of spending cuts to the tune of multiple trillions of dollars flies in the face of spending growing faster already than inflation plus population.

And the President's request for "a balanced approach" is actually a request for spending to grow faster than 2.5% per year in real, per capita terms and a request for taxes to grow faster in real per capita terms than 3.4% per year.

Such are the perils of baseline budgeting and the language around budgeting that is used in Washington.

Sometimes It's Even Worse

Well, I'll admit I was wrong.  A week or so ago, before the CBO score was out, I estimated that the Senate sequester replacement plan would defer most of the deficit reduction until later and do very little of it in 2013.

So in summary, the best case is that the bill reduces the deficit by about $8 billion this year.  The worse case is that it adds about $3 billion to the deficit this year.  Neither is anywhere close to $85 billion in deficit reduction this year.

Well now the CBO score is out and it is in fact worse than I thought.  Let's start with spending.  The Senate bill increases spending relative to the baseline with the sequester included by $63 billion.  In other words, it eliminates $85 billion in spending reductions in 2013 and replaces them with $22 billion in net spending reductions over the next 10 years.  And of this $22 billion, only $5 billion (net) comes in the next 5 years.

On the tax side, it adds $55 billion of tax increases, almost all of which come from the application of a new alternative minimum tax, beginning at incomes of $1 million.

So to review, the bill as scored by the CBO, replaces $85 billion in deficit reduction in 2013 achieved by spending reductions with $400 million of deficit increase in 2013 (a small spending increase almost offset by a small tax increase) and $77 billion of deficit reduction over the next 10 years, 72 percent of which ($55 billion over $77 billion) is tax increases.

So the "balanced proposal" of the Senate achieves no deficit reduction in 2013, less deficit reduction over 10 years than the sequester would achieve in 1 year, and has more than 70 percent of the deficit reduction coming from tax increases.

A replacement it is not.

The Impact of "A Balanced Approach"

All the discussion from the President has been about the need for "a balanced approach" to the sequester which, roughly stated, means replacing half of the spending cuts with tax increases.  Let's leave aside, for the moment, that the other aspect of "a balanced approach" seems to be kicking the can to the future and focus for a moment on the impact on spending growth and tax rates of this approach assuming it were to happen.

For the purposes of this argument, I'm going to assume that this notion of balance applies to both the sequester and the BCA caps.  The reason I'm making this assumption is that, were one to believe the President's argument, it probably should.  After all, why allow caps to be all spending when you can achieve the same deficit reduction through a mix of spending and taxes.

To make the analysis simple, I'm going to focus on the last year of the caps, fiscal 2021.  In the CBO baseline, total government spending is forecast to grow by 5.25% on average per year.  Now what happens if we let the caps go.  Well, in 2021, the caps and the sequester restrain spending by $178 billion (Table 1-5).  But we are going to go halfsies so we'll raise spending by only $89 billion that year.  This then would take the growth rate of spending up to 5.46% and spending as a percentage of GDP up to 22.8% from the current forecast of 22.4%

Now on the tax side, let's make the assumption that all of the tax increases come from "the rich" and that this plan continues through the period.  In total, on a 10 year basis, this would equate to a tax increase at least as large at the increase that just went through on the top rate over 10 years.  That increase raised the effective tax rate of the top 1% of taxpayers by 3 percentage points.  We might rightly assume that this would do similar taking the effective tax rate of that group to 39.4 percent, the highest rate ever by a fair margin.

Such is the effect of "a balanced approach."  Spending back up over 23 percent of GDP by the end of the forecast, the highest effective rates in measured history (which I remind you only goes back to 1979 where there was a 70 percent marginal tax rate), and an accelerating deficit and debt to GDP ratio.

The Times Should Know Better

You can expect the New York Times Op Ed page to be liberal but you should also have a reasonable expectation that it be factual.  Today, it published an editorial that may be the least factual thing I've ever seen.  I'm going to take the unique step of taking the major claims one by one only because it is such an awful piece.

Both are wrong. To reduce the deficit in a weak economy, new taxes on high-income Americans are a matter of necessity and fairness; they are also a necessary precondition to what in time will have to be tax increases on the middle class. Contrary to Mr. Boehner’s “spending problem” claim, much of the deficit in the next 10 years can be chalked up to chronic revenue shortfalls from the Bush-era tax cuts, which were only partly undone in the fiscal-cliff deal earlier this year.

OK.  As a starting point, this is ridiculous.  The CBPP link in the quote is obvious hokum and is completely devoid of historical context.  Tax receipts over the coming decade are planned to average 18.9% of GDP while during the 8 fiscal years of the Clinton administration (FY93 to FY01), they averaged 19.1% of GDP according to the OMB historical tables.  So, over the next 10 years, tax receipts are .2% of GDP lower than they were during the Clinton administration (aka before the "Bush Tax Cuts.")  But you should keep this thought in mind as we move through the editorial.

It stands to reason that a deficit caused partly by inadequate revenue must be corrected in part by new taxes. And the only way to raise taxes now without harming the recovery is to impose them on high-income filers, for whom a tax increase is unlikely to cut into spending.

Two problems here.  First, it absolutely does not stand to reason that a problem caused by inadequate revenue must be corrected by new revenue.  That's the very fallacy I discussed earlier in regard to the argument that it's all a health care spending issue.  But even more shocking is the Times inability to understand the GDP accounting identity.  In the view of the editorial writers, it appears to be GDP = C+G.  That's it.  There's no such thing as I in the accounting identity.  Thus, tax increases that cut investment don't affect GDP, only those which affect spending do.  Such a fundamental misunderstanding of macroeconomics 101 really is a bit shocking.

As it happens, those taxpayers are the same ones who benefited most from Bush-era tax breaks and who continue to pay low taxes. Even with recent increases, the new top rate of 39.6 percent is historically low; investment income is still taxed at special low rates; and the heirs of multimillion-dollar estates face lower taxes than at almost any time in modern memory.

Well this point is more misdirection than outright deception or misinformation but let's take the three points in order.  Those taxpayers are the same ones who benefited most from Bush-era tax breaks.  This isn't actually true if you look at changes in effective rates but why debate this when those tax breaks are no longer in force for those people.  Wouldn't you think that's a relevant thing to mention?

 Even with recent increases, the new top rate of 39.6 percent is historically low;  Wow.  But of course, people don't pay marginal tax rates, they pay effective tax rates and based on effective tax rates, the current rates of the wealthiest Americans are quite high relative to the last 33 years of history (the only good history we have).  The only year we have on record where the top 1% paid a higher rate than they are scheduled to pay in 2013 was 1979.  For the top 0.1%, the 2013 rate is the highest on record.

...investment income is still taxed at special low rates.  Investment income has been taxed at a differential rate in almost every year since the creation of the income tax.  The Times makes it sound as if this is some new innovation in the tax code.  We can debate differential taxation for capital income but this is not the way to do it, by pretending it is some new phenomenon.  We might also choose to note that the new tax rate on capital gains (23.9% including the ACA tax) is higher than the effective income plus social security (both sides) tax rate of all Americans except those making over $1 million.

It is true that estate tax rates are low today relative to recent history.  Of course it's also true that estate tax raise very little revenue so, in the context of a debate on the US's fiscal health, they are not terribly important.

On the spending side, Republicans are resisting cuts to defense. That implies brutalizing cuts in nondefense discretionary areas, like education and environment, which are already set to fall to their lowest level as a share of the economy since the 1950s.

Frequent readers will know that I personally have no issues with defense cuts; however, the Times is taking license and not informing again.  First, the government did not track nondefense discretionary spending until the 1960s so we don't know what we spent in the 50s (although I would assume the editorial is correct).  Most substantively, including the BCA and the sequester, defense spending is forecast to fall to its smallest share of GDP since 1940 (defense spending was actually measured by the government that far back).  Again, we can have a debate on whether we should care about either of these facts but not to mention both is simply spinning.

As for entitlements, Republicans mainly want to cut those that mostly go to the middle class and the poor, while ignoring nearly $1.1 trillion in annual deductions, credits and other tax breaks that flow disproportionately to the highest income Americans and that cost more, each year, than Medicare and Medicaid combined. 

The entitlements on which Republicans are focused are Medicare and Social Security which go to the elderly regardless of income.  One would imagine the Times is aware that the elderly are the wealthiest cohort of American society.  We might also wonder what the rationale is from the editors to pay Medicare benefits to Mr. Buffet and Mr. Gates.

But ignoring the $1.1 trillion in deductions, credits and tax breaks that flow disproportionally to the highest income Americans and that cost more, each year than Medicare and Medicaid combined requires a bit of unpacking.  First, the authors conveniently exclude Social Security, which, by itself, is planned to cost $810 billion in 2013.  SS and Medicare together are a $1.4 trillion expense item.  That comparison would seem germane given the discussion that has occurred over entitlements.

But about that $1.1 trillion number.  Interestingly in an editorial with links, it's unlinked.  Here you can find a link that gets you to a number that rounds to $1.1 trillion but that includes corporate and individual tax rates and one of the tax preferences is the already mentioned differential in the treatment of capital income.  And, importantly, tax preferences are more equally distributed than tax contributions.  In other words, people who pay 40% of the taxes get less than 40% of the tax expenditures.  Thus, the total elimination of tax expenditures would make the tax code less progressive.

The editorial closes with But there will never be a consensus for more taxes from the middle class without imposing higher taxes on wealthy Americans, who have enjoyed low taxes for a long time. And I can only add to the end "but no longer do."

The Tax Rates of the 50s and 60s

You can't throw a stick without hitting someone saying that everything would be fine if only we would go back to the tax rates of the 1950s and 1960s.  Normally, when this point is made, it is in a discussion about income tax rates and how low they are.  I have often been perplexed by this perspective since I have always thought that total tax receipts were lower during that period.  So I took a look.


The top graph shows personal tax receipts as a percentage of GDP by decade historically from the OMB historical tables and the bottom graph shows the current CBO forecast of personal tax receipts from 2013 to 2023 (post the changes in the ATRA).

Two conclusions make themselves pretty immediately evident.  First, the personal tax receipts were lower in the 1950s and 1960s than they were in any subsequent decade despite the higher marginal tax rates that were in place during that time.  Second, projected tax receipts under the ATRA quickly outpace the average of any decade during the entire postwar history of the country.  So while one can always argue that personal tax rates should be even higher, it is very difficult to argue that based on a "getting back to the successful economy of the 50s and 60s" framing.

The next part of this debate is to deal with the distributional question, namely that personal taxes on "the rich" were a lot higher in the 50s and 60s.  This is also not true but more on that in the next post.

When $85 billion is Really Less than $10 billion

There's been lots of reporting and hyperventilating about the sequester, so imagine the sighs of relief that must have gone up when the Senate Democrats announced their replacement bill.  Of course, it being Congress (either House), the bill is not actually available in any public forum.  We do know the name of the bill - The American Family Economic Protection Act - but the text is not yet available.

This article at Business Insider seems to be the best summary of the bill I can find.  Let's review the bidding.  First, the sequester is expected to reduce spending by $85 billion this year (that's fiscal 2013) from what would otherwise be spent and therefore reduce the deficit by the same amount.  So how much does the AFEPA reduce the deficit this year?  Let's take the bill's provisions one by one.

1.  Defense

Defense cuts are not implemented until 2014 and are then simply capped at .5% lower than the caps that already exist in 2014 and beyond in the BCA.  So defense savings in 2013 are zero and deficit reduction in 2013 is zero.

2.  Agriculture

It gets a little bit harder here.  The bill summary claims it saves $27.5 billion net, $31 billion gross but doesn't say anything about two critical points - whether interest is included and when the additional spending happens.  So the best case is let's say 1/10 of $27.5 billion or $2.75 billion savings this year.  The worst case would assume interest savings are in the total and the new spending all happens this year (in my view the most likely case given Washington budget language) and the savings start in 2014.  In this case, the bill probably has savings about about -$3 billion this year, meaning it marginally increases the deficit.

3.  Buffet rule

The bill claims roughly $50 billion in savings from the Buffet rule.  Based on previous CBO scoring of the Buffet rule, this almost assuredly includes interest savings.  What is again unclear is what assumption is being made about implementation.  I've found things that say now and things that say 2014.  So best case here is about $5 billion in deficit reduction and worse case is zero.

4.  Other tax changes

They account for only $3 billion in total over 10 years so their one year impact is negligible in any event.

So in summary, the best case is that the bill reduces the deficit by about $8 billion this year.  The worse case is that it adds about $3 billion to the deficit this year.  Neither is anywhere close to $85 billion in deficit reduction this year.

Interestingly, both would push the deficit forecast this year back over $1 trillion.