How Much of the Commission’s Deficit Reduction Comes from Tax Hikes?

by Bob Stein

I think the commission’s cuts in discretionary spending are much smaller than meets the eye.

First, I think they are unenforceable. If the commission were serious, they would have proposed a return to presidential impoundment authority. Second, and more importantly, the numbers look to me — and I am not the final authority here — like the commission is working off the president’s budget, not the CBO baseline, in terms of calculating deficit reduction.

So, for example, in 2020, the commission says it would reduce the deficit by $761 billion. But $197 billion is from interest savings, leaving $564 billion in “primary” savings. (We should focus on the primary deficit, so interest savings due to tax revenue increases are not counted as a form of spending cut when they’re actually due to higher revenue.)

Of this $564 billion, the commission claims, $241 billion is in reduced discretionary spending. But it appears that’s relative to President Obama’s budget. Relative the CBO baseline, the discretionary cuts will be about $156 billion (see page 16 of the commission report). Meanwhile, the commission will cut entitlements by $119 billion and raise taxes by $203 billion. Again, this is all for 2020 only.

So, out of a “primary” deficit reduction of $478 billion, tax increases would make up $203 billion, or 42 percent. And that’s assuming the discretionary spending cuts last that long. If they don’t, and we revert back to where we would otherwise be spending in 2020, tax hikes make up 63 percent of deficit reduction.

Worse, if we acknowledge that the president’s budget is a spending hike relative to the CBO baseline, and if we eventually get back to the Obama path of discretionary spending, tax hikes would be 85 percent of the deficit reduction.

That said, I think the commission did fairly well with Social Security. Eighty percent of the 75-year shortfall is fixed by reducing future benefits, with only 20 percent due to raising the tax cap. I do not like raising the tax cap, but it is not nearly as bad as lifting the cap completely. Most of the increase in revenue will come from people who are still earning above the level of the new higher cap, and so it will not influence them at the margin. For most affected workers, it will be like a lump-sum tax: annoying, but with no impact on incentives. (One way to think of it is like leaving the top income tax rate the same but lowering the income threshold where it kicks in.)

 — Bob Stein is senior economist with First Trust Advisers.

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