Economist Mom

Copies of Obama's 2012 budget proposal rest in front of Senate Budget Committee Chairman Kent Conrad, right, and Sen. Jeff Sessions on Capitol Hill in February 2011. (J. Scott Applewhite / AP / File )

A $2 trillion 'make-up' call

By Diane Lim Rogers, Guest blogger / 03.23.11

Following up on my post from last Friday on CBO’s analysis of the President’s budget, let me explain that the Obama Administration’s seemingly low-ball estimates of deficits under their own proposals isn’t so much a case of (very) “dynamic scoring” as a sort of “make-up call.”

I thought I’d provide some apples-to-apples numbers to help see what’s going on. Recall that CBO scores the ten-year deficit under the President’s proposals at $9.470 trillion, while OMB (the Administration) says it would be only $7.205 trillion–a more than $2.2 trillion difference. It turns out that most of this difference is due to the Administration’s much rosier assumptions about the pre-policy baseline and the level of revenues that would be collected under current law. The CBO and OMB estimates of the cost of the President’s tax proposals (or more accurately, the net revenue loss under the President’s budget compared with current law) are actually very similar.

So here are the relevant numbers, all for the ten-year period of fiscal years 2012-21. The CBO numbers come from their analysis linked above, and the OMB numbers come from the summary tables in the President’s budget:

CBO (all found in their Table 1): Revenues under the current-law baseline: $39.032 trillion;
Revenues under the President’s FY2012 budget: $36.702 trillion; so…
Difference (net revenue cost of President’s proposals): $2.330 trillion.
OMB: Revenues under their “adjusted” baseline (from their Table S-3): $37.928 trillion;
BUT this adjusted baseline took out $3.070 trillion in extended tax cuts that they count as “current policy” (see Table S-7); so…
Implied revenues under current law (add the $3.070 trillion back in): $40.998 trillion;
Revenues under the President’s FY2012 budget (from Table S-1): $38.747 trillion;
So, note, difference from current law due to the President’s proposals ($40.998 - $38.747): $2.251 trillion. (Pretty darn close to CBO’s $2.330 trillion–only $79 billion (over ten years) apart.)
Difference between assumed current-law baseline revenues (OMB minus CBO): $1.966 trillion.

So, out of the $2.2 trillion difference between CBO and OMB estimates of ten-year deficits under the President’s proposals, nearly $2.0 trillion comes not from differences in their cost estimates of the tax-cut proposals nor from differences in how effective those tax cuts might be in growing the economy/changing the economic forecast (”dynamic scoring”–which isn’t done in these budget forecasts anyway), but rather from the differences in how strong they think the economy and therefore the levels of revenues would be even with no change in tax policy.

So it’s not anything sneaky or sinister buried in the Administration’s estimates, but it’s just a very optimistic view, for sure, and it certainly serves as a sort of “make-up call” in that the $2.0 trillion in “rosier scenario” effectively covers about 85-90 percent of the cost of President Obama’s proposed extension of what used to be the (Obama-labeled “fiscally-irresponsible”) Bush tax cuts.

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Comptroller General Eugene Dodaro takes part in a news conference on Capitol Hill in Washington in February 2011, to discuss the Government Accountability Office's (GAO) "High Risk Series" report. The GAO recently released a long-term fiscal outlook, which shows a growing gap between revenue and spending. (Alex Brandon / AP / File )

Will the US still have a spending problem in 2040?

By Diane Lim Rogers, Guest blogger / 03.22.11

The GAO just released its update of their long-term fiscal outlook report. This figure shows federal spending (the bars) and revenue (the line) under GAO’s “alternative” scenario, which is closely related to the Concord Coalition’s “plausible baseline” which assumes–more pessimistically but probably more realistically than current law–that most of the expiring tax cuts are extended and that discretionary spending grows at the same rate as the economy (GDP) rather than only with inflation.

Just by the way, note that the President’s proposed budget is much closer to this “alternative”–and to the higher associated deficits–than to current law. (More on that point and elaborating on what I said on Friday about CBO’s analysis of the President’s budget soon.)

My immediate interest in putting up the chart above from the GAO report is that many people like to point to this picture (or very similar pictures) as evidence that the current deficit and longer-term fiscal gap is a “spending (only) problem” and not a revenue problem. The revenue line doesn’t droop after all, even in this worse-if-not-worst case scenario where current deficit-financed tax cuts are permanently extended. And the spending bar just keeps on growing.

But note by 2040 we will only be collecting enough revenue to cover the costs of net interest and not quite all of Social Security. Note that we don’t have a choice about cutting out net interest as long as we’ve continued accumulating the debt that interest pays for. Note that net interest is by far the fastest-growing component of spending and comes to dominate not just Social Security but both all of discretionary spending (actually, all other spending besides the programs mentioned) and Medicare and Medicaid combined. And note that even if it is judged by many to be a “spending problem” (only or mostly), it’s nearly impossible to imagine squeezing all the spending our society will still view as essential over the next few decades under that very low (but “historically average”) revenue line–or how we will decide what doesn’t make the cut, when the wiggle room beyond net interest is so very tiny and getting smaller by the minute.

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Congressional Budget Office Director Douglas Elmendorf testifies before a House Budget Committee hearing on the CBO's Budget and Economic Outlook report on February 10, 2011. (mv2/ZUMA Press/Newscom/File)

Can tax cuts really pay for themselves?

By Diane Lim Rogers, Guest blogger / 03.21.11

The Congressional Budget Office’s (preliminary) Analysis of the President’s Budget just came out. Will have more to say after a more careful read this weekend, but a few things immediately jump out from the main tables in the report:

Deficits under the President’s budget proposals as estimated by CBO are more than $2.2 trillion higher than estimated by the Administration. (Ten-year deficits are $9.470 trillion according to CBO, vs. $7.205 trillion according to the Administration’s Office of Management and Budget. See bottom lines on Table 3, page 18.)
CBO estimates the total cost of the President’s proposals to be $2.733 trillion over ten years. The great bulk of this (85%) is the cost of proposed tax cuts, at $2.331 trillion–without including any additional interest costs associated with these tax cuts.
In fact, if you decompose the cost of the spending proposals into mandatory, discretionary, and net interest effects, you find that the contribution of tax cuts is more than 100 percent of the total cost. Again from Table 3, the President’s mandatory proposals cost $1.335 trillion over ten years, and his discretionary proposals save $1.452 trillion over ten years, for a net $117 billion in savings without interest. In other words, the higher net interest costs of $519 billion over ten years are due entirely to the deficit-financed $2.3 trillion in new tax cuts.
It is only coincidental that the difference between CBO’s estimate of deficits under the President’s proposals and the Administration’s (OMB’s) own estimate ($2.2 trillion) is almost identical to CBO’s estimate of the cost of the tax cut proposals ($2.3 trillion). But it effectively means that through the Administration’s rosier assumptions (which I hope to investigate further), they are implicitly suggesting–or at least not contradicting–the notion that tax cuts pay for themselves. On the Administration’s part there seems to be some implicit denial about what this tax-cut-monopolized budget means for the deficit.

Oops! Somehow this doesn’t seem like a very good start on our path to fiscal sustainability.

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Americans For Tax Reform member Grover Norquist speaks to an audience at the 38th annual Conservative Political Action Conference meeting at the Marriott Wardman Park Hotel in Washington, February 11, 2011. Guest blogger Diane Lim Rogers writes that Norquist has gotten a few things wrong. (Larry Downing / Reuters / File )

Can Grover Norquist change tax policy?

By Diane Lim Rogers, Guest blogger / 03.14.11

I think Ezra Klein shows remarkable restraint in his interview of anti-tax activist Grover Norquist in today’s Washington Post. There’s something very scarily familiar about Grover’s “winning” view of the (fiscal policy) world he works within. The “best” answer is his last (emphasis and endnotes added):

GN: The goal is to reduce the size and scope of government spending, not to focus on the deficit. The deficit is the symptom of the disease. And there are several reasons to oppose tax increases.
First, every dollar of tax increase is a dollar you didn’t get in spending restraint.[1]
Two, you walk into the Democrats’ Andrews-Air-Force-Base, Lucy-with-the-football trick for the third time in a row.[2]
In ‘82 and ‘90, the Republicans were smart, tough, focused guys. They were taken to the cleaners. The Republicans negotiating with the Democrats are negotiating with Dick Durbin. Durbin. Durbin! Does Durbin have an interest in cutting any government program in the history of the world at any time in his life? No. Never. He’s there to sucker Republicans into putting their fingerprints on a tax increase so when you go into an election, people say, “Can’t trust them. They’ll raise taxes.”
The reason it won’t happen is that the Republicans have taken the pledge and made a promise to their constituents that they won’t increases taxes.
No, there won’t be a tax increase. That’s not happening. It’s an odd way to spend your time. I think golf and cocaine would more constructive ways to spend one’s free time time than negotiating with Democrats on spending restraint.[3]

[1] No, every dollar of a tax cut or tax increase avoided is another dollar of spending that we’ve deficit-financed and hence made seem as if “free.” Until we force spending increases to be offset by increased taxes, (even) Republicans have little incentive to control spending.

[2] I don’t exactly get this analogy, but Grover sure seems to be channeling Charlie Brown here. (Hmmm…a little bit insecure and paranoid, perhaps?)

[3] So does cocaine explain Grover’s (fiscal policy) world view?!

I also find it interesting how throughout the interview Grover manages to attack and/or insult just about everybody, including the conservatives/Tea Partiers he’s trying to woo. (Catch the reference to guns and home-schooling.)

I mean, let’s just call a crazy a crazy.

“Winning” is not possible for us if we allow losers like this to sway public opinion and policy.

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Those involved in budget talks are acting like children. What will it take to have some real "adult conversations" about the deficit? (Daniel Sicolo/Design Pics/Newscom)

Temper tantrums over the deficit

By Diane Lim Rogers, Guest blogger / 03.07.11

Ezra Klein so aptly wonders whether John Boehner is more likely to lead on the solution or to continue to be a big part of the problem:

Remember Boehner attacking Democrats for holding ”a press conference to pat themselves on the back for ‘protecting’ Medicare, even though their government takeover of health care bill would cut seniors’ Medicare benefits by $500 billion”? Remember how he ended that statement? “Are you kidding me?”
Which gets to the real issue here: the public isn’t so much resistant to deficit reduction as receptive to demagogic attacks on the sort of policies needed to reduce deficits — including the ones we’ve already passed into law. Boehner has proposed some sort of truce on these issues to Obama — the president responded “positively,” Boehner said — but it’ll be the terms and strength of that detente, not whatever happens at constituent workweek, that’ll decide whether we get to a deal. And to a lot of Democrats, Boehner’s offer sounds a bit suspect: the GOP, having won the election in large part by hammering Democrats for Medicare cuts, wants an agreement to end criticism of Medicare cuts right before they propose some of their own. It’s got a very “do as I say, not as I do,” feel to it.
If Boehner is going to convince Democrats that this is good faith rather than crass calculation, he’ll need to go first. One way to start? Adopting a more balanced and honest take on the Affordable Care Act. No more calling the bill “job destroying” because it makes people richer and makes it easier for early retirees to buy health care on their own. No more attacking the bill for being both fiscally irresponsible and for cutting Medicare and taxing high-value health-care plans. The truth is, the Affordable Care Act does more to control costs in Medicare than any single piece of legislation we’ve ever passed. If Boehner is so serious about a new tone and an educational discussion over entitlements, then it’s time for him to admit that.

It seems to me that for all the talk about the need for “adult conversations” about the budget deficit, we continue to see immaturity on the issue from all the political sides of the debate: temper tantrums about the small stuff, denial over one’s own role in the mess, bullying and finger-pointing about it being the other side’s fault, clinging to fairy tales and fantasies (such as about deficit-financed tax cuts or investments paying for themselves), ignoring advice we don’t like (even that we have ourselves asked for–i.e., the fiscal commission), and shirking our duties as the parents to our kids (by letting the debt continue to pile up). There’s a huge amount of psychological dysfunction among our leadership right now. How can we get anywhere with deficit reduction if there aren’t any adults in charge? Where is the analogous miracle-worker (fiscal) therapist–if even Alice hasn’t yet proven to be the one?

(Addendum: Perhaps CBO director Doug Elmendorf is the “therapist” Congress needs.)

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Council of Economic Advisers (CEA) Chairman Austan Goolsbee speaks at left as White House Press Secretary Robert Gibbs, center, huddles with National Economic Council Director Gene Sperling, in the James Brady Press Briefing Room of the White House in Washington, Friday, Feb. 4, 2011. The new CEA report avoids making "tough choices," writes guest blogger Diane Lim Rogers. (Charles Dharapak / AP / File )

What the president’s economic report leaves out

By Diane Lim Rogers, Guest blogger / 02.28.11

Today I got a note from Bruce Bartlett pointing out that in the new Economic Report of the President there is no mention of the terms “tax reform” or “entitlements.” (Bruce did a search of the entire pdf document.) But that doesn’t surprise me because even if the report had actually discussed better ways to raise revenue or to trim the costs of the Social Security and Medicare programs, it would have judiciously avoided using the dirty words “taxes” or “entitlements.”

More disappointing is the fact that it wasn’t just semantics. The President’s Council of Economic Advisers really did avoid the substance of the “tough choices” on tax and spending policy–you know, all that “fiscal responsibility” and “living within our means” that the President loves to mention only as an abstract virtue and never as a specific proposal.

And the CEA even went beyond not emphasizing the need for tax and entitlement reform. With their main theme for this year’s report being “The Foundations of Growth” (the title of their Chapter 3), they had the nerve to completely leave out an explanation of how deficits very directly harm economic growth by reducing public and national (public plus private) saving. The omission is obvious from the first sentence of the second paragraph in Chapter 3, which says:

At the core of the Nation’s economic growth is our capacity to innovate, educate, and build.

…but then goes on to devote the rest of the chapter to the innovating, educating, and building (the “investing”), just assuming we already have the capacity (the “saving”) to do all that innovating, educating, and building. But we don’t have either the private saving or public saving to fund those investments, so we have to be talking about borrowing to finance those investments. And the problem with borrowing to finance even the kind of spending that may encourage economic activity is that there’s no guarantee that we will come out ahead on net, after we have to repay the debt (with interest).

During the Clinton Administration we learned that reducing the federal budget deficit contributed positively to the economy’s productive capacity by boosting national saving. In President Clinton’s final economic report, we explained that the direct, positive boost to public saving was barely offset by any decline in private (household and business) saving.

Now take it in reverse, because in this economic report the Obama Administration is trying to make the case for deficit-financed ‘investments”–all those things that fall under the “innovating, educating, and building’ umbrella–as investments that are good for economic activity. I don’t dispute that those types of spending and tax cuts will generate specific types of economic activity that otherwise would not have happened. But it is another matter entirely whether those investments will pay off so well that they will grow the economy even net of the negative effect of higher budget deficits on national saving. When you borrow to finance an investment, you start off in a hole. To end up better than before you have much further to climb.

Many of these ideas the Obama Administration has for new spending and tax cuts to encourage certain investments in our economy are good ones. But whether they are good enough to overcome the handicap of deficit financing, I’m not so sure. (Some of you might recognize that these deficit-financed investments are destined to generate the Democrats’ version of the Republican push for “dynamic scoring” of deficit-financed tax cuts.) A far surer payoff could be had if instead of deficit financing these investments we paid for them by reducing the types of federal spending and tax cuts that are much less productive uses of our precious resources.

For the President’s economists to not explain that deficit financing tends to reduce, not increase, national saving and economic growth–in a report which purports to address the central question “how can we best grow the economy?” no less–is extremely disappointing and even, I think, dishonest.

What happened to the Austan Goolsbee (now President Obama’s chair of the CEA) who wrote this just 4 years ago?

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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.

Actress Mitzi Gaynor sings in the 1958 film production of the musical "South Pacific." Guest blogger Diane Lim Rogers writes that people who think that the president and congressional Republicans will come to an agreement on the budget this year sound a lot like Ms. Gaynor in the number "A Cockeyed Optimist." (20TH CENTURY FOX/Album/Newscom)

Cockeyed optimists and the federal budget

By Diane Lim Rogers, Guest blogger / 02.21.11

In Sunday’s Washington Post, the “Topic A” question (at the back of the A section) asked about the (my italics) “prospects that the president and congressional Republicans would reach a serious budget deal this year.” My answer was “basically nil” because politicians still view putting things on the table as admitting fault. Bill Gale’s answer was “small” because the Republicans are still too entrenched in their “no new taxes” fantasy world. Maya MacGuineas sounded a bit more optimistic that policymakers might actually try doing the right thing but only after they try all the wrong things first! But Alice Rivlin, the only person who was on both President Obama’s fiscal commission as well as (co-chair of) the Bipartisan Policy Center’s version, was clearly the most optimistic of us all, saying (emphasis added):

Here is an optimistic scenario that could result in a serious long-run budget agreement this year: First, a bipartisan group of senators crafts a long-run budget plan that slows the future growth of Medicare and Medicaid, puts Social Security on sound fiscal basis, simplifies the tax code to raise more revenue from broader base with lower rates, and caps discretionary spending (defense and domestic). This step doesn’t take long, because the bipartisan group is already working and has the Simpson-Bowles and Domenici-Rivlin plans to build on. Next, the president and the House leadership join the negotiations. Political perceptions begin to shift. After the sharp world-market reaction to the brief battle over the debt-ceiling increase, all participants are scared of not acting. Fear of taking the first step to slow entitlement growth or raise additional revenue is replaced by fear of being blamed for blowing up the deal and throwing the economy into a new tailspin. The deal no one thought possible is signed in the Rose Garden in the October sunshine, markets react positively, business steps up hiring and economic growth accelerates.

I think Alice was thinking like Mitzi Gaynor’s “Cockeyed Optimist” (in South Pacific, above)–right down to the bright canary yellow skies! Then when the Post came out with an op-ed by Alan Simpson and Erskine Bowles, the co-chairs of the president’s commission, also displaying an unusual helping of optimism (right above our Topic A responses), I realized that for one to want to chair a fiscal commission for a task as impossible (given the politics) as deficit reduction, one must be an inherently optimistic person. So they’re just “commission-eyed optimists.”

Which, by the way, is the way you can tell a true devotee to fiscal discipline apart from a wannabe who plays a fiscal hawk for purely political gain. As my boss (the Concord Coalition’s executive director) Bob Bixby likes to say, if it were all “doom and gloom” we wouldn’t keep doing what we do to try to encourage fiscal responsibility.

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President Barack Obama walks with Office of Management and Budget (OMB) Director Jack Lew on the South Lawn of the White House in Washington as they travel to Baltimore, Md., Monday, Feb. 14, 2011. The latest proposal shows a budget that would cut the deficit in half by 2013. (Charles Dharapak / AP )

A budget proposal fit for Valentine's Day

By Diane Lim Rogers, Guest blogger / 02.14.11

Here’s OMB director Jack Lew explaining how the Obama Administration’s proposed budget (released this morning) will reduce the budget deficit over the next ten years–cutting it in half by 2013 and by two-thirds by 2020. Problem is that that’s only relative to a “baseline” that builds in a lot of tax cuts that go beyond current law (extended beyond their expiration), and the President’s budget stays away from the major pressures on the federal budget–the growth of Medicare and Social Security spending and the lack of a solid enough revenue base to keep up with that spending.

I think it’s a fitting “Valentine’s Day” budget because it only pays “lip service” to the work of the President’s fiscal commission, writes a lot of “love notes” to those enduring Bush/Obama tax cuts, and still contains an awful lot of red ink.

More details later.

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President Reagan addresses the Nation from the Oval Office on Tax Reduction Legislation in 1981. Guest blogger Diane Lim Rogers writes that President Reagan showed an unfair picture of tax cut proposals in this address. (Courtesy of the Ronald Reagan Library )

Confusion about tax cuts traces to Reagan

By Diane Lim Rogers, Guest blogger / 02.07.11

I think I may have found the seeds of the “largest tax increase in American history” rhetoric–the start of Americans’ confusion about tax cuts vs. tax increases, whether tax cuts add or subtract from the deficit, and whether tax cuts shrink or grow the size and reach of government.

One of my kids first shared the photo above, from a July 1981 address of President Reagan to the nation on competing tax proposals being considered in Congress at that time. Only when I first saw the photo I didn’t know what “our bill” vs. “their bill” referred to and the first thing to come to me (perhaps because the photo came from my daughter) was that “our bill” meant “our generation’s bill” (what we would pay for) and “their bill” meant “our kids’ bill” (what they would end up paying for).

I had to hunt down and watch the video of the address (on YouTube, here) to figure out that Reagan was referring to his Administration’s favored tax cut proposal (which he labels a “bipartisan” bill) versus a competing Democratic proposal (which also was for a tax cut but a smaller tax cut that ends up being labeled a tax increase).

In any case, how is this address supposed to have helped Americans understand what was at stake regarding tax proposals, the deficit, and the role of government? Note the highly informative (not) labeling of the Y axis scale in the chart Reagan features, and the general obfuscation of the choice between the competing tax (cut) proposals.

If you read Chapter 5 on “The Early Reagan Era: 1981″ in Gene Steuerle’s excellent book “Contemporary U.S. Tax Policy”, you’ll see this assessment of Gene’s in the section titled “It Didn’t Add Up” (pages 96-97):

The 1981 tax reductions were in many ways an extremest parody of previous tax reform efforts, especially the Kennedy round of tax reduction. Investment incentives proliferated and drove many tax rates to zero or below…Base broadeniing to remove special preferences that reduced that tax base was abandoned–not just early on, as in the Kennedy round–but completely.
Most of all, the change in underlying budget conditions was set in the law, and Congress in 1981 effectively removed the fiscal slack that the next congresses would need to enact their own laws and set their own priorities. This was the biggest mistake of all…The 1981 cut…was enacted in an era when it would be vastly harder to harvest future revenues that hadn’t yet been committed.

I know there’s a lot of nostalgia right now about President Reagan given his 100th birthday, but it’s clear our politicians didn’t need that as an excuse to renew the early-Reagan-era rhetoric. But they should read ahead to the next chapter in Gene’s book that talks about the tax increases that began the very next year (1982). Tax policy tends to be cyclical like fashion; what goes around comes around.

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Eliminating "holes" in the tax system that reduce taxable income could help the deficit start to shrink. (Creativ Studio Heinemann/Westend61/Newscom)

Oh 'holey' tax system

By Diane Lim Rogers, Guest blogger / 02.04.11

Fed Chairman Ben Bernanke gave a very good speech today at the National Press Club. In it he emphasized why having a plan to get back to economically sustainable deficits is not only important for longer-term economic growth, but to our near-term economic health as well. He also suggested that “acting now to develop a credible program to reduce future deficits” is not so daunting a task now that the President’s fiscal commission and related groups have put forward proposals that “provide useful starting points.”

Chairman Bernanke then hints about what he likes about the commission proposals, in his concluding paragraph (emphasis added):

Of course, economic growth is affected not only by the levels of taxes and spending, but also by their composition and structure. I hope that, in addressing our long-term fiscal challenges, the Congress and the Administration will seek reforms to the government’s tax policies and spending priorities that serve not only to reduce the deficit, but also to enhance the long-term growth potential of our economy–for example, by reducing disincentives to work and to save, by encouraging investment in the skills of our workforce as well as in new machinery and equipment, by promoting research and development, and by providing necessary public infrastructure. Our nation cannot reasonably expect to grow its way out of our fiscal imbalances, but a more productive economy will ease the tradeoffs that we face.

With tax policy, the only way to raise revenue (and reduce the deficit) while reducing disincentives to work and to save is to broaden the tax base rather than raising marginal tax rates. Luckily we have tremendous room to broaden the tax base, because the existing federal income tax base is really “holey”–as in chock full of holes.

Such tax base “holes”–as in special exemptions, deductions, and credits that narrow the definition of taxable income–comprise the bulk of what are labeled “tax expenditures.” In total, federal tax expenditures add up to around $1 trillion per year, or about as much as all of discretionary spending (both defense and nondefense) combined.

It so happens that the Tax Policy Center’s Donald Marron testified before the Senate Budget Committee yesterday and very clearly presented the case for getting rid of some of these tax expenditures, in the title of his testimony calling “cutting tax preferences” the “key to tax reform and deficit reduction.” His main points:

My message is simple: the income tax is riddled with tax preferences. These preferences narrow the tax base, reduce revenues, distort economic activity, complicate the tax system, force tax rates higher than they would otherwise be, and are often unfair. By reducing, eliminating, or redesigning many of these preferences, policymakers can

Make the tax system simpler, fairer, and more conducive to America’s future prosperity;

Raise revenues to finance both across-the-board tax rate cuts and deficit reduction; and

Improve the efficiency and fairness of any remaining preferences.

Donald later explains some analysis with Eric Toder that I have previously mentioned here, stressing the point that when tax preferences take the form of reducing the definition of taxable income (what I think of as “poking holes” in the tax base), then they both reduce revenues and expand (not reduce) the size of government. Donald’s bad news for tea partiers is that to be truly committed to smaller government may require a willingness to give up one’s (very own) tax preferences and end up paying more, not less, in taxes (my emphasis added):

In some preliminary research, my Tax Policy Center colleague Eric Toder and I (2011) have tried to estimate how large the government is when we recognize that many (but not all) tax preferences are effectively spending programs. For fiscal 2007, we estimate that spending-like tax preferences amounted to 4.1 percent of GDP. Adding that to official outlays yields a broader definition of spending, 23.7 percent of GDP in 2007, about a fifth larger than the official 19.6 percent. Similarly, our broader definition of revenues—official revenues plus revenues foregone through spending-like tax preferences—is 22.6 percent of GDP rather than the official 18.5 percent.
These figures illustrate that conventional budget measures understate the extent to which federal fiscal policy affects economic activity. They also suggest that some policy proposals that increase revenues, as conventionally measured, may nonetheless reduce the size of government. If policymakers reduce the tax preference for employer-provided health insurance, for example, that would increase federal revenue but reduce the government’s role in private insurance markets.
Advocates of smaller government are often skeptical of proposals that would increase federal revenues. When it comes to paring back spending-like tax preferences, however, an increase in revenues may actually mean that government’s role is narrowing.

The trouble is that once people start realizing that reducing government “spending” may include things like reducing the subsidy to employer-provided health insurance received via their (very own) tax exclusion, instead of clamoring for government to get smaller they might start screaming that “the government needs to get its hands off of”…”my tax preferences.”

The “holey” tax system enlarges the deficit and enlarges the government, but most of us don’t want to give up our (very own) precious holes. See, tax cuts can be just like spending dressed up in a different costume.

(**NOTE: here’s the link to Donald’s own blog post on his testimony, and here’s a link to the Senate Budget Committee page where you can read/watch testimony by the other witnesses, Gene Steuerle, Rosanne Altshuler, and Larry Lindsey.)

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