Baseline Madness–‘No Non-New Taxes!’: A big selling point of the debt deal for conservatives seems to be that it will be hard for the new 12 member Joint “SuperCongress” Committee to meet its $1.5 trillion debt-reduction goal by raising tax rates–because the committee’s “baseline” will already assume that the Bush tax cuts are going to expire at the end of 2012. From Jennifer Rubin’s blog:
A GOP aide authorized to speak on background explains: “CBO’s current law baseline assumes millions of middle class families will be hit by the AMT and also assumes large, across-the-board tax increases in 2013 (i.e., the expiration of all 01/03 tax rates). With current law as the baseline to measure deficit reduction, efforts by this Joint Committee to increase revenue would not officially ‘reduce the deficit’ unless the proposed tax increases are in excess of $3.5 trillion — in other words: tax hikes aren’t going to be a part of this deal. Tax hikes on top of tax hikes are a non-starter for the American people. …”
Keith Hennessey seems to agree:
If the Committee allows tax rates to increase in 2013 (aka “raise tax rates in 2013,” or “let the Bush-Obama tax cuts expire,” depending on your point of view), the additional revenues raised will not count toward the Joint Committee’s target since this is already current law. So raising these tax rates doesn’t help the Committee meet their $1.5 T deficit target. That doesn’t mean they can’t include them in their legislation (they can), just that they can’t get any numeric benefit for doing so. That is incredibly important.
But, as Hennessey admits, the SuperCongress committee would have an incentive to recommend “new” taxes:
But other “new” tax increases would count toward the Joint Committee’s deficit reduction target. If the Committee eliminates depreciation for corporate jets, for instance, or or repeals or scales back carried interest or LIFO, or caps itemized deductions for high-income tax filers, those would score as tax increases relative to current law, and the Committee would get credit for deficit reduction for including those tax increases,
OK. I’m still confused, though.
I understand the Joint Committee won’t just be able to let the Bush tax rate cuts expire, do nothing else, and take credit for the resulting reduction in debt. But surely that isn’t the only scenario.
Suppose the Committee discusses a deal that allows the Bush tax cuts to continue for another two years on anti-recessionary grounds. Presumably it would be dinged by CBO for the cost of those cuts (because they are not in the “baseline.”) Knowing this, it decides to more than make up for that lost revenue by capping the mortgage interest deduction for families making over $250,000 a year, raising the Social Security retirement age and making a variety of tough beyond-the-baseline changes to Medicare (increasing co-pays, cutting provider payments, charging affluent recipients more).
But now the victims of those changes squawk. The housing industry wants the deduction capped at a much higher income level–say $400,000. Unions resist the retirement age increase, noting that many of their members do physical labor that exhausts them by age 65. And doctors threaten to quit Medicare en masse if provider payments are cut further. The SuperCongress committee hears those complaints, and decides to lessen the severity of the cuts.
How does it make up for the lost money? By letting income tax rates go up just a little–in other words, repealing part of the Bush tax cut. Surely it will be credited by the CBO with the increased revenues from this rate increase, which means it will not have to find the equivalent amount of savings in that nasty home mortgage/Social Security/Medicare tangle of powerful interests.
In other words, contra Hennessey, the Joint “SuperCongress” Committee would indeed get a “numeric benefit” for raising tax rates above what they are currently. Functionally, I don’t see where this doesn’t provide a pretty strong incentive for the committee to propose raising the rates (or letting them rise). If you assume that more than $1.5 trillion in cuts (or “new” taxes, or closed loopholes) are in play in the committee, why isn’t the incentive to raise rates (or let them rise) more or less exactly the same as it would be with a lower tax “baseline”?
The same scenario could provide a similar incentive to increase the number of taxpayers subject to the Alternative Minimum Tax.
I must not be understanding something. [Update: Hennessey explains all. He seems to think the above analysis is correct, but it’s not such a big deal, since cutting extra elsewhere and then raising rates to ameliorate the cuts is “going in a circle.” I’m not so sure. The tax rates right now are the low Bush rates, remember. Lots of people (including Hennessey) think those low rates are going to be extended. But every dollar the Joint Committee can get by letting the current rates rise is a dollar it doesn’t have to cut elsewhere. Seems like a big deal to me if you care about tax rates…. I agree that Hennessey’s dispute with Obama advisor Gene Sperling about the likely treatment of tax reform–lower rates with fewer loopholes–is more significant.]
P.S.: Hennessey suggests that “tax rate fights’–e.g. the fight over the Bush tax cuts– “are most likely to occur outside this [new debt-deal/Joint Committee] process.” I assume he’s right. But if so, what does that say about the value of the process? You mean Congress can go through this emotional, lengthy, elaborately choreographed new ritual to cut $1.5 trillion from the deficit–and then in the next minute Congress can blithely blow another huge hole in the deficit by extending the Bush tax cuts “outside” the new deficit-cutting “process”? Can they also pass payroll tax cuts “outside the process”? Create new loopholes? What’s the “process” good for?
Maybe there is some additional PAYGO-style control on tax cuts that I am (again) missing. [Update: Hennessey says I’m not missing something–but again, argues it’s not such a crippling flaw:
The Committee has been set up to produce incremental deficit reduction, not to lock in an entire budget framework. So Mr. Kaus is right, depending on how you measure deficit reduction, a successful Joint Committee process could see its work “undone” by later legislation to keep tax rates low, patch the AMT or Medicare doctors’ payment rates, or ready more shovels. But those separate legislative efforts will happen with or without the Joint Committee, right? So a deficit hawk should like having such a committee, no? [E.A.]
Again, this seems like a bigger deal to me. Voters could be excused from thinking that the debt-ceiling deal, enacted with so much fuss and fanfare, actually brings the deficit problem under control, not that it leaves open the possibility that it will immediately (but more quietly) be undone by “outside the process” initiatives from each party–Republicans with tax cuts, Democrats with stimulus and “investment.” Revenge of the regular, old, non “Super” committees! … If Hennessey is right, in other words, the deal seems like a bit of a fraud. …