In his slides selling the emerging debt ceiling deal to the GOP caucus, Speaker Boehner writes that the proposed “super committee” charged with coming up with an additional $1.5 trillion of deficit reduction over 10 years will be forced to use CBO’s current law baseline, making it “impossible… to increase taxes.” What does this mean, and is it true?
CBO’s current law baseline assumes that the 2001/2003 (commonly called the “Bush”) tax cuts – extended through the end of 2012 under a compromise deal last December between President Obama and the House GOP – will finally expire for everyone on December 31, 2012, at which point tax rates will revert to their pre-2001 levels (plus tax hikes passed as part of health care reform). There’s a lot of revenue riding on the expiration of the Bush tax cuts: CBO estimates that letting them expire for everyone will raise $2.5 trillion in revenue over a decade compared with extending them permanently for everyone, not counting additional deficit reduction from lower interest payments.
So when the “super committee” makes its deficit recommendations this coming November, the only revenue proposals that would score as actual deficit-reducers under a current law baseline would be those raising more revenue than would be true assuming the Bush tax cuts expire.
The GOP is betting that as a result, raising taxes will prove “impossible”. That’s probably because the only revenue raising Congress might have a stomach for would be tacked-on to fundamental tax reform of, say, the Bowles-Simpson type. But changing the fundamental nature of the income tax system effectively nullifies the expiration of the Bush tax cuts: after all, how can the 10% bracket, for example, rise to 15% percent if there is no more 10% bracket? In the earlier debt ceiling talks, Obama and Boehner were considering added revenues of $800 billion to $1.2 trillion; it was approaching the upper-end of that range that ultimately compelled Boehner to walk away. But keeping revenues in line with current law assumptions would require twice as much extra revenue.
Clearly, then, raising revenue under a current law baseline would face high political hurdles.
But it wouldn’t be “impossible.” First, the committee could of course just choose to raise marginal rates above their pre-2001 levels, though I’m guessing most variations of this idea would be DoA in a GOP House. Too bad too, because there’s a decent case to be made on the merits for raising the gas tax.
Second the committee could choose to eliminate or change tax expenditures without touching marginal rates and brackets, as long as they were tax expenditures that would otherwise have been permanent fixtures of the tax code. The mortgage interest deduction is one example; the exemption of employer-sponsored health insurance is another.
Third, the committee could come up with a brand new tax added-on to the current tax system. A carbon tax or a VAT would both fit this description.
So there’s actually plenty of accounting room for higher revenues under a current law baseline. The seminal question is whether there’s any political room in the era of the Tea Party.
UPDATE 1 (10:44pm): My friend Michael Linden writes that the White House is denying that the legislation constrains the committee to any particular baseline. Guess we’ll know more tomorrow.