What the Long-term Revenue Changes in Obama’s Budget Would Achieve

Try a simple exercise. Take President Obama’s revenue proposals at face value and see what they tell us about the fiscal world in 2020.  The bottom line: A major tax cut relative to doing nothing, but nonetheless an increase in tax revenues to something close to historical levels. And continued large and unsustainable deficits.

How can we cut taxes and get more revenue? (Hint: It’s not the miracle of supply-side economics.) The answer lies mainly in economic growth and increases in average tax rates in both the regular tax and the Alternative Minimum Tax (AMT).

By far the dominant tax proposal of the President is to extend the Bush tax cuts and continue to protect many middle-class taxpayers from the AMT.

• By 2020, the budget assumes an annual revenue loss of about $500 billion if we extended all of the Bush tax cuts and indexed the AMT for inflation, but kept some estate tax.     
• The President would then reverse some of that loss by raising taxes, mainly on higher income people, by about $140 billion—largely through restoring their pre-Bush tax rates and capping the value of their itemized deductions. 
• Other “revenue changes and loophole closers” would bring in about $50 billion, including about $10 billion in a bank tax, $12 billion in international tax changes, and slashing tax subsidies for fossil fuel producers.
• Other revenue losers (such as credits for higher education, research and children) would cost about $40 billion.

Some highly touted tax cuts are simply aren’t around very long or are quite small by comparison.    For instance, bonus depreciation costs $22 billion in 2010 and $15 billion in 2011, but then raises almost same amount from 2012-2020 since it’s only defers taxes. The making work pay tax credit costs roughly $60 billion, spread over two fiscal years, 2010 and 2011. The allowance for jobs initiatives, split between the revenue side and the spending side, would cost about $75 billion, two-thirds in 2011. Those are significant numbers, but they are long gone by 2020. Doubling of the child and dependent care credit would be permanent, but would only cost around $1 billion in 2020.
 
The net loss in revenues (-$500b + $140b + $50b – $40b) would be about $350 billion relative to doing almost nothing other than retaining some estate tax. The Administration argues that it is increasing taxes by $150 billion relative to what they argue is the current “policy,” including all of the Bush tax cuts.

Still, the federal government would collect significantly more revenue as a share of GDP than it does today. The President’s budget counts on fairly big revenue gains from economic growth and recovery—including more capital gains, stock options, bonuses, and other income at the top of the income distribution.  Average tax rates would also increase because of restoration of some Bush tax cuts and because higher real incomes move taxpayers into higher tax rate brackets in the regular income tax and makes more of them subject to the AMT (even if the AMT is adjusted to prevent inflation from doing the same). 

Taxes would rise by about 5 percentage points of GDP—from 14.8 percent in 2009 and 2010 to 19.6 percent in 2020 (that is, from well below to above the 18.0 percent average since 1960). That rate increase alone brings in about $1.2 trillion just in the year 2020.

At the end of the day, the President still joins Congress in avoiding any legislation that would directly ask the middle class to contribute anything to help address an unsustainable deficit.