President Obama’s Tax Gap

Keith Hennessey has an excellent post on tax levels that clarifies a number of issues. He begins with the following observation:

Over the past 50 years federal taxes have averaged 18% of GDP. Governor Romney proposes taxes “between 18 and 19 percent” of GDP. The House-passed (“Ryan”) budget proposes long-term taxes of 19% of GDP. President Obama’s budget proposes long-term taxes at 20% of GDP.* The Bowles-Simpson plan proposes long-term taxes at 21% of GDP.

You’ll notice that Hennessey places an asterisk next to President Obama’s budget proposal. The reason is that while the president’s budget proposal does far less to contain spending than the Bowles-Simpson plan — which, as Hennessey observes, is “much closer to and shaped like the Ryan plan,” though its spending levels are somewhere between the Ryan budget and the Obama budget — it raises taxes considerably less as well. 

Recall that President Obama has explicitly vowed not to raise taxes for low and middle-income households. His main commitment on taxes has been to preserving all of the Bush-era tax cuts with the exception of the high-income rate reductions. But allowing the high-income rate reductions to expire won’t move the needle very much in terms of revenue:

For comparison, the ongoing partisan fight over whether to extend today’s tax rates for “the rich” is a fight about half a percent of GDP. The difference between the Ryan and Obama long-term tax levels is twice as big, and the difference between the Ryan and Bowles-Simpson plans is four times as big. Also, the legislative difficulty of closing these gaps is not linear, meaning it is more than twice as hard to close a gap that is twice as large, because policymakers make the easiest changes first.

This raises the obvious question: if we assume that the Obama White House does not intend to embrace the steep spending reductions proposed by Ryan and by Bowles-Simpson, i.e., if the federal spending trajectory he embraces will exceed Bowles-Simpson levels, how does he intend to close the large revenue gap between his proposal and the Bowles-Simpson proposal? 

The president and his allies have (rightly) pointed out that the Romney-Ryan tax plan raises more questions than it answers, e.g., which tax expenditures will be reduced or eliminated? But what we don’t often discuss is that the same is true of the Obama-Biden tax plan. The Obama-Biden ticket has had the luxury of both claiming fiscal rectitude and attacking draconian spending cuts by calling for revenue levels higher than the levels that would be generated by the Bush-era tax code. Yet the revenue levels Democrats have been willing to defend are not plausibly in line with their spending commitments, and more broadly with their aspirations for increases in public investment.   

The revenue gap between the Romney-Ryan’s 19% and Obama-Biden’s 20% is significant. But the notional spending gap is between Romney-Ryan’s 19-20% and Obama-Biden’s 21%+. One could make a strong case that Romney-Ryan can’t realistically achieve that 19-20% spending target without making really dramatic changes to the health safety net, which will disadvantage some beneficiaries. Indeed, Democrats have been making exactly that case for weeks, and something like this case for decades. This is a debate we can and should have.

But shouldn’t we also have a better understanding of how Democrats intend to close the revenue gap between their spending commitments and their commitment to having middle-income households pay Bush-era taxes? Is this realistic? Can the gap be closed solely by raising taxes on $250K+ households? If so, how? 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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