Obama plans to cut taxes. And raise them, too.

Here’s a quick multiple choice quiz about President Obama’s new budget.

Over the next ten years, would the budget:

a. Increase taxes by $819 billion

b. Cut taxes by $2 trillion

c. Increase taxes by $1.6 trillion

d. All of the above.

If you answered (d), you have a fine future as a budget watcher.

As noted expert Johnny Depp demonstrated some months ago, it all depends on how you measure things.

For starters, you might compare ten-year tax revenues under the President’s proposal ($38.747 trillion) to what they would be if there were no new policy actions ($37.928 trillion under the President’s notion of “baseline” policy). That gives you answer (a), a tax increase of $819 billion.

But wait. The President’s baseline assumes that many expiring tax provisions get extended. They include the “middle-income” tax cuts originally passed in 2001 and 2003 and now scheduled to expire after 2012, the “patch” of the alternative minimum tax through 2011, and 2009-style estate tax law through 2012. If you treat extending those provisions as a policy choice—a defensible view since it will take new legislation for them to happen— you should score them not as freebies, but as a $2.845 trillion tax cut. Offset that by the President’s $819 billion in tax increases and you get answer (b): the budget calls for roughly a $2 trillion tax cut.

But wait again. Congress and the President recently had a chance to let the “high-income” tax cuts expire. And they didn’t. And they enacted a new estate tax law for 2011 and 2012 that’s lower than 2009 levels. Those are now (temporarily) the law of the land. So you might view them as being current policy. And relative to that policy, the President’s baseline represents an $807 billion tax increase. Add in the other $819 billion and you get answer (c), a tax increase of about $1.6 trillion.

The President’s budget would thus cut taxes by $2 trillion relative to current law, but raise taxes by $1.6 trillion relative to current policy. Or something in between if, like the President, you prefer to use a baseline that’s a mix of current law and current policy.

Does your head hurt yet?

If not, please move on to our extra credit short essay question. How can we square any of these figures with the Administration’s talking point that the budget reduces future deficits by $1.1 trillion with about two-thirds of that coming from spending cuts?

Think about that for a moment. On its face, that would seem to imply that one-third of the deficit reduction comes from revenue increases. And that would put the revenue increase somewhere in the neighborhood of $350-400 billion.

Which bears no resemblance to any of our earlier figures.

I am not sure of the exact calculation behind the talking point (anyone?), but it appears that the main issue is that the administration identifies only some tax increases as being related to deficit reduction. For example, the budget includes an additional $328 billion in revenue to finance new transportation projects. Those revenues are not counted as reducing the deficit. And the budget includes another $56 billion in higher revenues from “program integrity” efforts – i.e., administrative actions to improve enforcement of the tax code. As best I can tell, that revenue, too, is not counted as part of deficit reduction (perhaps because budget experts are hesitant about giving credit for purely administrative changes).

With those two adjustments, it appears that the deficit-reducing revenue increases, as the Administration measures them, total about $425 billion over the next ten years. Which is still more than a third of the $1.1 trillion in deficit reduction. But maybe we are close enough for partial credit.

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