Wednesday we let you try to make Republican presidential candidate Mitt Romney’s tax plan add up. It’s only fair that we ask you to do the same for President Obama.
SOURCE: Institute for Taxation and Economic Policy, Congressional Budget Office, and Office of Management and Budget. GRAPHIC: Kat Downs, Ezra Klein, Todd Lindeman, Dylan Matthews and Andrew Metcalf – The Washington Post. Published Oct. 31, 2012.
But Obama faces a different task than Romney. He needs to raise revenue not to pay for new tax cuts, but as part of the $4 trillion deficit reduction “grand bargain” he has consistently advocated since last summer. Obama says $1.5 trillion of that should come from tax reform. These are 10-year figures, so in 2015, this would mean that Obama wants $150 billion in additional revenue.
Obama’s promise to let the Bush tax cuts expire for high earners would generate about $110 billion in 2015 alone. That means Obama only needs another $40 billion in revenue to meet his target. That’s a big number, but actually a fairly trivial sum in the context of the federal budget. It’s only 0.275 percent of GDP, according to OMB projections, while Romney’s hole is 2.64 percent of GDP.
Any number of new policies could meet Obama’s goal (the White House outlined a set of proposals in the current code here, but said they’d prefer to raise the money through comprehensive tax reform). A carbon tax or VAT would do it, limiting the mortgage interest deduction would do it, as would adopting Clinton-era estate tax rates. What’s more, Obama could raise more money from tax loopholes than Romney. That’s because deductions and exemptions are worth more the higher rates get. Losing a $1,000 deduction when your tax rate is 39.6 percent costs $116 more than losing it when your rate is 28 percent. Because deductions are worth more under Obama’s rates, getting rid of them raises more revenue for him than it does for Romney.
So a “fill the $40-billion-hole” game wouldn’t be a whole lot of fun. Instead, we’re giving you two challenges. The first, easier one is to meet Obama’s target. But the more ambitious goal is meeting the revenue target set by Alan Simpson and Erskine Bowles, the deficit hawks who co-chaired the National Commission on Fiscal Responsibility and Reform that Obama created in 2010. The Simpson-Bowles plan, laid out here, calls for another $1.35 trillion in revenue over 10 years in addition to Obama’s high income rate increases. That works out to $135 billion a year, according to Marc Goldwein at the Committee for a Responsible Federal Budget, who was on the fiscal commission’s staff when the plan was written.
That’s still much less than Romney’s gap, but it’s also less trivial to meet than Obama’s goal. Obama is calling for modest tax increases. Simpson-Bowles calls for larger tax increases. Given that House Republicans are likely to push Obama for more than the $4 trillion in deficit reduction he’s pledged, it’s worth seeing how one could go beyond Obama’s pledge through the tax code. The Simpson-Bowles target is as good a starting point as any for that exercise.
As with Wednesday’s game, we don’t estimate the effects of these changes on different income groups. You won’t see how a carbon tax or ending the employer health-care tax break affects the poor or the rich or the middle class. But we do provide context on who benefits from certain tax breaks today, and what social purpose they serve.
As with the Romney plan, some of the options below break pledges Obama has made, most notably his pledge not to raise taxes on the middle class. Almost all the options below raise taxes on people making less than $250,000. But pledges are often broken.
So you have two missions. First, get the $40 billion that Obama’s deficit target requires. Next, get the $135 billion that Simpson-Bowles’ target requires. Good luck.
Related: The Romney tax reform calculator.