'Taxes up!' 'Taxes down!' Why we should look ahead, not behind

Economists and pundits score points by comparing tax proposals to current or past tax positions ('baselines'). They're missing the point: Look to the future, not the past.

Illustration / Glow Images / Newscom
Which is the more important question: how budget proposals compare to past or current law, or what they will do to shrink the deficit?

My TPC colleague Howard Gleckman wrote the other day about the confusion caused by the multiple baselines advocates use to measure the effects of tax proposals. But baselines don’t really matter. What’s important is not where we start or how things change but where we end up.

Baselines are largely political. Partisans use whichever version strengthens their ability to bludgeon opponents in an essentially Inside-the-Beltway game. Voters, thoroughly confused by this arcane and complex scorekeeping, can’t figure out who’s telling the truth.

Because a baseline does give you a starting place from which to calculate change, it helps measure the effects of tax proposals. You can see that a new tax raises revenues compared to some prior year, or that it raises taxes for high-earners relative to what they paid at some time in the past. But those are often the wrong questions.

The trouble is that these starting points are entirely arbitrary. There is nothing inherently “right” or “wrong” about the tax law as it was in 2000, or in 2003, or this year. Nothing makes any of them more or less worthy as a basis for measurement. The problem with evaluating whether a given policy yields a good outcome is our lack of agreement about the right answer. A tax that strikes me as too regressive may seem too progressive to you. Federal revenues claiming 20 percent of GDP will look egregiously high to people who want smaller government but anemic to those who want government to do more.

The right question is what does a particular level and design of tax mean for individuals and the economy.

For example, letting all the 2001-03 tax cuts expire would mean federal revenues will total about 20 percent of GDP over the coming decade; making them all permanent would cut that share to roughly 18 percent. This is true no matter what baseline you start from. By contrast, President Obama’s plan to extend the cuts for all but the highest-earning 2 percent of households would claim 19 percent of GDP. Each option would also distribute taxes in its own way across households in different income categories. This is also true regardless of what baseline you start with.

What you must do is ask yourself these questions: Given growing concern about exploding federal deficits, does a particular tax policy generate enough revenue to fund the government you want? Does it collect revenues in the most efficient way so it does the least harm to the economy? And does it spread taxes fairly across the income distribution? Those queries are hard to answer but pondering them is far more useful than asking whether taxes will rise or fall relative to a baseline, or whether it will take more or less income out of the pockets of those in a particular income group than it did at some time in the past.

Of course, tax policy choices will always be political. And since we have no absolute standard for assessing taxes, any evaluations of proposed changes will always be subjective. But as you listen to the Washington debate, keep your eyes on the prize: not baselines but on where we end up.

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