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Five takeaways from the CBO’s analysis of Obama’s budget

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For the most part, the description of President Obama's budget found in the Congressional Budget Office's analysis of it jibes with the description included in the initial budget release. But the CBO analysis does highlight some interesting features of the proposal. Here are a few.

1. Obama's tax increases are largely about limiting deductions

For years, Obama has been proposing capping itemized tax deductions at the level of benefit that people in the 28 percent tax bracket get. That means that single people making more than $183,250 and couples making more than $223,050 will get 28 cents back for every dollar of deductions they get, rather than 33, or 35, or 39.6 cents back.

That got a little overshadowed during the presidential contest, when Mitt Romney proposed his own vaguely defined deduction cap proposal. And it made less of a difference when there weren't high earners paying the 39.6 percent rate, as there are now. But with that rate back in place, and because of chained CPI pushing more people into higher brackets (more on that later), the deduction cap is Obama's single most important revenue increase. The CBO estimates that the plan will raise $493 billion over 10 years.

For comparison, Obama's budget raised $974 billion in new revenue over the course of 10 years. The deduction cap represents more than half of that.

2. Chained CPI is as much about raising taxes as cutting benefits

The proposal to change the measure of inflation used for federal programs to chained CPI, which rises more slowly than conventional inflation measures, is usually framed as a Social Security cut. And it is. The CBO estimates that it will save $133 billion in Social Security (Update: and some non-SS, Marc Golderin reminds me; $89 billion is the Social Security total) costs over 10 years.

But it's also a tax increase. Currently, the cutoffs for different tax brackets rise with CPI-U, a non-chained measure of inflation. Chained CPI would cause the cutoffs to rise more slowly, pushing more and more people into higher tax brackets. That raises $99 billion over 10 years. So about 43 percent of the deficit reduction from chained CPI comes from increased taxes, not spending reductions.

3. Ending wars saves a lot of money

On net, Obama's budget reduces spending by $172 billion over 10 years, but that includes a number of big cuts and a number of big new spending initiatives. Canceling the sequester and budget caps, for example, costs $970 billion all together, and transportation funding increases, the Medicare "doc fix", and extending refundable tax credit expansions from the stimulus (to wit, the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit) all cost more than $100 billion apiece.

But that's more than offset by cuts elsewhere. The single biggest, at $601 billion in savings, is the proposal to "reduce spending on overseas contingency operations" -- that is, winding down the wars in Iraq and Afghanistan. The CBO baseline assumes we continue current spending in those countries. Tying up those loose ends does wonders for the overall spending picture.

4. The tobacco tax's revenue doesn't fall

One worry, expressed well by Brad Plumer here, about the administration's scheme to pay for preschool with an increase in the tobacco tax is that you want revenue from such taxes to fall, as they induce people to smoke less and get healthier. That was certainly the picture you got from the administration's initial budget release, which forecast lower revenue in 2022 and 2023 than upon the tax's initial implementation.

But the CBO finds the opposite. It finds that the tax raises $7 billion in 2014, $8 billion every year from 2015 to 2019, and $9 billion every year from 2020 to 2023. So its revenue increases over time, rather than decreases. It's unclear which of these projections is more reasonable, though intuitively Brad's logic seems sounder than the CBO's here.

5. Obama already has money for corporate tax reform

The budget proposal includes broad outlines of Obama's plan for a revenue-neutral corporate tax reform package. That includes making the Research & Experimentation Tax Credit permanent, making a new preferential expensing policy for small businesses permanent, ending "last in first out" inventory accounting and limiting the ability of companies to hold money offshore to defer tax payments. Taken altogether, these proposals raise $66 billion.

Now, to afford a significant rate cut, he's going to need to cut deductions more than that. The Committee for a Responsible Federal Budget (CRFB) estimates that it costs about $100 billion to reduce the corporate tax rate one percentage point. By that reasoning, the Obama savings would make it possible to cut the rate from 35 percent to … 34.33 percent. That's not the most dramatic change in the world, but it is a start.