The voices of Tax Policy Center's researchers and staff
When the Tax Policy Center reported last month that Senators Obama's and McCain's tax proposals would both reduce federal revenues by trillions of dollars over the coming decade, both campaigns complained that TPC was using the wrong baseline to measure revenue changes. Instead of measuring revenue against current law, they asserted, analysts should assess the plans against "current policy." In fact, the choice of baselines is in some sense irrelevant as a gauge of our fiscal problems.
Under current law, almost all of the Bush tax cuts enacted since 2001 will vanish after 2010, returning the tax code pretty much to where it was in 2000. In addition, the alternative minimum tax will affect more and more taxpayers because its exemption level is fixed at 2001 levels, far below those of recent years. Both factors would cause revenue to soar, particularly after 2010, setting a high standard against which to measure the effects of tax changes—19.8 percent of GDP from 2009 through 2018 by TPC estimates.
So what's the difference between current law and current policy? The second assumes that the Bush tax cuts would continue and annual AMT "patches" would maintain the real dollar value of the AMT exemption. That means that revenues in coming years would fall to 18.2 percent of GDP, according to TPC. That averages more than $350 billion a year less than current law—an easier standard to meet.
No wonder the campaigns like to compare their proposals to current policy! While Obama's plan falls short of current law revenues by $2.9 trillion over the next decade, it would raise nearly $600 billion more than the current policy baseline. And the cost of McCain's tax proposals would fall from $4.2 trillion under current law to just $600 billion—a mere pittance in the budget world.
But what really counts isn't which baseline is used; it's how revenues stack up against spending.
TPC estimates that Obama's tax plan would raise revenues equal to 18.2 percent of GDP; McCain's proposals would collect 17.6 percent. On the other side of the ledger, the Congressional Budget Office projected in January that federal spending will total 19.7 percent of GDP over the coming decade under specific—perhaps unrealistically optimistic—assumptions about expenditure growth. Neither candidate's tax plan comes close to raising enough revenue to cover that cost.
TPC didn't analyze either candidate's full economic plan. Both nominees promise to cut spending below current levels and collect more revenues than TPC estimates. But, measured against projected spending, both plans would dig awfully deep revenue holes that any new administration will find hard to fill.
So all this wonky bickering about baselines should give way to straight talk on how much each candidate plans to raise and to spend. That's what matters.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.