A number of people have observed that President Obama’s recent deficit plan raises the estimated level of public debt relative to the current law baseline. William Gale recently explained the differences between a current law baseline and a current policy baseline:

The baseline that OMB uses is a measure of “current policy”: it assumes the extension of all of the 2001 and 2003 tax cuts, the indexation of the AMT for inflation, the non-reduction of Medicare provider payments, and the continuation of military operations at full throttle in Iraq and Afghanistan (it does not appear to assume that the run-of-the-mill temporary tax policies, the so-called “extenders,” are extended).
I have argued elsewhere that, in many ways, it makes more sense to use current law as the baseline. (http://www.brookings.edu/events/2011/0817_deficit_committee.aspx) Ultimately, the most important thing is where the proposal ends up in terms of deficits, debt, taxes, and spending.

I recommend reading the rest of Gale’s post for a positive interpretation of the president’s proposals.

Almost all elected Republicans and Democrats favor departing from the current law baseline, as returning to it would force the president to abandon his campaign pledge to insulate households earning less than $250,000 from tax increases. This pledge has proven increasingly problematic for the Obama administration as spending levels, and planned spending levels, have increased, yet there is a perception that advocating for tax increases below that threshold could prove politically fatal. Republicans tend to favor starting from current policy and, to the extent possible, cutting taxes even further. Democrats generally favor retaining the 2001 and 2003 tax cuts aimed at households earning less than $250,000, the problem being (a) these cuts represent the bulk of the revenue loss, (b) they have the weakest “dynamic effects,” and (c) much of the revenue loss actually benefits over-$250K households.

The Tax Policy Center recently estimated the impact of the president’s recent tax proposals on various tax units relative to a current policy baseline and a current law baseline. And as a I suspected, it looks like the main impact of the proposals is to insulate upper-middle-class households relative to the current law baseline. This is very important, because the president’s main source of leverage now is that he can veto Republican efforts to further extend current policy, thus restoring the status quo ante.

Relative to the current law baseline, large numbers of middle-income households receive a tax cut. The groups that benefit most from the president’s proposal relative to the current law baseline appear to be tax units earning $75K to $100K, 98.4 percent of whom receive a tax cut, and tax units earning $100K to $200K, 98.9 percent of whom receive a tax cut. For $200K to $500K tax units, the households that Justin Fox has referred to HENRYs (High-Earners, Not Rich Yet), 95.2 percent receive a tax cut. For $500K to $1M, 60.6 percent receive a tax cut. And for $1M+ households, the numbers flip: 32.8 percent receive a tax cut worth an average of $42,140 relative to current law baseline while 67.2 face a tax increase worth on average $61,155.

Relative to the current policy baseline, in contrast, all of the groups I cite above face larger tax increases, as you’d expect. The $500K to $100K and $1M+ tax units face a very substantial tax increase. Interestingly, the $100K to $200K households, which I’ve identified as politically crucial, do not. While the Tax Policy Center estimates that 65.5 percent of these tax units will face a tax increase, it will average out to $424. Note that the tax cut these tax units will benefit from relative to the current law baseline averages out to a healthy $4,239.

One of the complexities here relates to the AMT, i.e., the alternative minimum tax, and how it impacts different households. My impression remains that President Obama’s proposed tax shifts have been solicitous of the interests of upper-middle-income households, i.e., $100K to $200K tax units, living in high-tax jurisdictions, in large part, I suspect, because this is a crucial political constituency. And he has also been fairly solicitous of HENRYs living in high-tax jurisdictions.

Now, why do I specify high-tax jurisdictions? The AMT currently impacts large numbers of households living in high-tax jurisdictions because the deduction for state and local taxes lowers the tax burden for this households enough to trigger the AMT. This is less of a concern for households living in low-tax jurisdictions, for whom the state and local tax deduction is by definition less valuable. If the Obama administration intends to essentially raise the threshold of the AMT so that only tax units earning over $1M are impacted, it is easy to see how this might represent a very welcome shift for what we might colloquially refer to as the “blue-state upper-middle-class.”

For illustrative purposes, high-tax jurisdictions include states like California, New York, New Jersey, Connecticut, and Maryland, all of which include large numbers of upper-middle-income political contributors, voters, and households containing at least one organized public employee or administrator.

I should stress that that the Tax Policy Center analysis is preliminary.