Obama’s Budget: $1.009 Trillion in Net Tax Increases

by Patrick Brennan

This week, the White House released, along with the president’s 2014 budget, the following summary of President Obama’s ten-year deficit reduction plan:

The President stands by the compromise offer he made to Speaker Boehner during “fiscal cliff” negotiations in December 2012.  The Budget includes all of the proposals in that offer, which would achieve $1.8 trillion in additional deficit reduction over the next 10 years, bringing total deficit reduction to $4.3 trillion. . . .

·   $580 billion in additional revenue relative to the end-of-year tax deal, from tax reform that closes tax loopholes and reduces tax benefits for those who need them least;   

·   $400 billion in health savings that build on the health reform law and strengthen Medicare;  

·   $200 billion in savings from other mandatory programs, such as reductions to farm subsidies and reforms to federal retirement benefits;  

·   $200 billion in additional discretionary savings, with equal amounts from defense and nondefense programs;  

·   $230 billion in savings from using a chained measure of inflation for cost-of-living adjustments throughout the Budget, with protections for the most vulnerable;  

·   $210 billion in savings from reduced interest payments on the debt; and  

·   $50 billion for immediate infrastructure investments, as noted earlier, to repair our roads and transit systems, create jobs, and build a foundation for economic growth. 

You might be forgiven for thinking, therefore, that the president’s ten-year budget includes $580 billion in new taxes. But you’d be wrong. In fact, the White House has proposed net revenue increases over the next decade of much more than $580 billion — it’s more like 1 trillion dollars.

That number is net increases in revenues over the next ten years — there is actually more than $1.009 trillion in revenue in the budget, but some of it the administration sequesters for pay for corporate-tax reform he asks Congress to propose, and some of them are canceled out by reductions in taxes elsewhere or new tax credits and deductions.

Here’s how they all add up:

$199.8 Billion in Mandatory-Program Tax Increases
The easiest trick to pull out is the “$230 billion in savings from using a chained measure of inflation for cost-of-living adjustments throughout the Budget.” This is only truthful if you consider increased revenue over the next ten years “savings,” and the inflation adjustments made automatically to income-tax brackets each year “cost-of-living adjustments.”

$100 billion of that $230 billion comes from increased tax revenues, because chained inflation will cause the thresholds for each tax bracket to rise more slowly each year than they would otherwise. You’d have a hard time figuring out this spending/taxes breakdown, though, as it’s not made clear in in the budget’s main summary tables. You can merely find (on page 189, for instance) the fact that chained CPI will reduce outlays by $130 billion over ten years, while in a subtable on page 217, finally, you see that the plan to “adjust indexing” will mean $100 billion more in revenue.

In that same category, we find the “total receipt effects” of “mandatory programs” in the budget. They add up to a whopping $233 billion over the next ten years, including the $100 billion already explained. Not all of them should necessarily qualify as tax increases, though: Increased contributions toward retirement plans for federal employees, new payments for government-enriched nuclear fuel, or higher fees for air-traffic-control coverage aren’t really tax increases, though they’re not exactly spending cuts, either (the president counts them as the latter) — but there are big changes to the unemployment insurance system that involve higher payroll taxes, for instance.

Those combined with the chained-CPI shift add up to $199.8 billion in more taxes over the next ten years.

$582.6 Billion in Higher Income Taxes on the Wealthy
There’s one tax increase that the president is upfront about, because it’s exclusively devoted to deficit reduction, in some sense: His increase in individual income taxes by capping the value of any tax deductions at 28 percent of income, meaning that Americans’ who pay a 33, 35, or 39.6 percent rate on any of their income will only get 28 cents in value from itemized deductions (and a few other exemptions, including some health-care premiums, above-the-line deductions, and others). That raises $529.3 billion by the Obama OMB’s reckoning. Another $53.4 billion is raised by the Buffett Rule, a minimum income tax on “millionaires” of 30 percent with an exclusion for charity (the phrase “millionaires” — here meaning those an annual income of more than $1 million — and “the Buffett rule” should really never appear in any serious-minded budget document). Combined, that’s $582.6 billion in new revenue.#more#

$78.1 Billion in Higher Tobacco Taxes
Then there’s new revenue from increased tobacco levies (the excise tax per pack of cigarettes will go from $1.01 a pack to $1.95, for instance) and indexing them to inflation. For better or for worse, rather than considering this tax “deficit reduction” (since without it, well, the deficit would be higher) the budget categorizes this tax hike as a “policy initiative” (page 186) because it’s used to pay for his plan to expand pre-K education. As Brad Plumer pointed out this week on Wonkblog, this is an unbalanced equation: Preschool will keep getting more expensive and expansive, smokers are dying off and the tax is supposed to reduce smoking anyway, to the point where the revenue starts decreasing after 2016. (Ezra Klein considers this plan and it’s pay-for one of the “three best ideas in Obama’s budget” anyway.) That will either mean even more tax increases after the ten-year budget window (and maybe before that, too) or increased deficits. But remember, it’s just a policy initiative.

$148 Billion in Miscellaneous Other Taxes
Last, there’s $148.5 billion in “other revenue proposals” over the next ten years. There’s actually more than that, in miscellaneous new tax increases — $238 billion — but that’s offset by $89.5 billion in new tax credits and deductions that reduce other sources of revenue, such as a permanently larger child tax credit. The biggest parts of this potpourri of revenue proposals are higher estate and gift taxes ($78.6 billion), a “financial crisis responsibility fee” ($59.3 billion), the reinstatement of Superfund taxes ($20.2 billion), and the taxation of carried interest as ordinary income ($15.9 billion).

$1.009 Trillion Total
When you add all these new taxes together — and to the extent possible, I’ve excluded sources of revenue that aren’t really taxes – the president’s budget, despite the $580 (or $600) billion number you’ve seen floating around, raises taxes by $1.009 trillion. That’s $34 billion more than the Senate Democrats’ budget.

The president’s budget also includes a net $95 billion increase in corporate taxes over ten years, but doesn’t count this as if it will actually be a net gain, because the revenue is set aside in a fund to pay for corporate-rate cuts. It includes, for instance, $141 billion in new targeted tax credits and preferences just for “manufacturing, research, clean energy, and insourcing and creating jobs.” That’s in addition to the billions our tax code already spends on doing a not-terribly-good job on those exact same things.

It more than pays for these new distortions, though, with, for instance, $157 billion expected to be raised from expanding the U.S.’s levies on income abroad (already the world’s most aggressive), $30 billion in higher taxes on the life-insurance and financial industries, and $43 billion in totally arbitrary levies on fossil-fuel companies (they won’t be able to expense drilling costs, for instance, in the way other companies can do with other intangible costs). In theory these net revenues will be used to pay for reducing the corporate-tax rate as part of a larger corporate tax reform the president calls on Congress to implement — after he’s gotten his chance to provide tax benefits to industries and causes he likes and to soak those he doesn’t like. That’s probably the real point of this exercise in creating a “reserve for revenue-neutral business tax reform,” but if those proposals all became law, too, the president’s budget would raise $1.104 trillion in new tax revenues, by my reckoning. (But these additional corporate-tax numbers are not included in the summary and deficit projections for his budget.)

This is all fairly hard to discern from the budget itself — while I don’t trust that Senate Democrats will be able to follow through on their promise to raise $975 billion from closing loopholes for just wealthy Americans and big companies, at least they were honest about the amount of tax revenue they proposed, and the amount that they needed to achieve the deficit reduction they did while spending what they wanted.

The president’s budget does no such thing. You would never heard that it proposes, and requires to provide for both deficit reduction and new spending, just over $1 trillion in tax hikes. But the baseline numbers don’t lie: The CBO’s baseline from February of 2013 (after the president got his first round of tax increases, that is) predicts that the federal government will raise $40.241 trillion in revenue through 2023. Under the president’s plan, that number is $41.231 trillion, just a little more than the Senate Democrats proposed, in fact, or $990 billion higher. The gap between the president’s proposed revenues and his own budget office’s adjusted baseline is even larger, in fact: $1.142 trillion.

The discrepancy between these gaps (between baseline projected revenue for the federal government and the revenue the Obama budget calls for) and the net tax increases is due to the fact that increased receipts are not necessarily higher taxes per se, as I explained above.

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