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Does the Obama budget raise taxes? Or cut them?

at 10:37 AM ET, 04/14/2011

This should be an easy question to answer. The president’s proposal says it includes “three dollars of spending cuts and interest savings for every one dollar from tax reform.” That’d make the ratio 3:1. But as Ethan Pollack, a senior fellow at the Economic Policy Institute and a former staffer on the Fiscal Commission, points out, another calculation — and one that’s just as valid — suggests it’s 2:1. Or maybe 1:1. Or maybe, in case you’re not sufficiently confused, there’s actually a big tax cut in the plan, and no new revenues whatsoever.

To understand why this is so hard to measure, you need to understand both what’s in the president’s plan and, perhaps even more importantly, what’s behind it. The proposal says that it’ll raise $1 trillion in new revenues over 12 years by closing or curbing various tax expenditures. But it also assumes the expiration of the Bush tax cuts for income over $250,000 — an assumption that nets you another trillion dollars or so over the same period, but that they’re not including in their 3:1 calculation.

So let’s go back to that 3:1 calculation. What they’re implying here is that the proposal is $3 in spending cuts for every $1 in tax increases. That is to say, it relies much more heavily on spending cuts than on tax increases. But if you look closely, they’re including a trillion in reduced interest payments in the spending cuts category. There’s no real reason, however, that reduced interest payments should count as spending cuts. After all, some of those reduced interest payments are coming because we’ve raised taxes. If you put the interest payments in their own bucket — something the White House does often when it encourages people to look at the “primary deficit,” which excludes interest payments — the ratio of actual spending cuts to tax increases is more like 2:1. And then, if you add in the expiration of the Bush tax cuts for the wealthy, it’s more like 1:1.

But that gives the White House too much credit. As the law is written, it’s not just the tax cuts for income over $250,000 that expire in 2012. It’s all the Bush tax cuts, which amount to about $4 trillion over the next 10 years, of which the cuts for the rich are less than $1 trillion. So the Obama administration is saying it’s going to extend about 80 percent of the Bush tax cuts and let 20 percent of them expire. Even if you add in the trillion dollars they’re looking to raise by cleaning out the tax code, that means that means that the sum total of their policy — both what’s included in their budget proposal and what’s hidden behind it — amounts to large tax cut when compared to current law. Their policy only amounts to a tax increase if you ignore the massive tax cut they’re building into its background assumptions.

 
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