Senator Barack Obama (D-Ill.) has laid out enough of a fiscal
blueprint as part of his presidential campaign to allow us to read
his intentions: higher taxes on the rich, more spending, slower
economic growth, and silence on the critical issues of Medicare and
Social Security's long-term plight. There is little in Obama's
future plans that do not cause conservatives consternation.
Surprisingly, though, in one respect his plans should already be
causing real heartburn--for congressional Democrats.
The relevant elements of Obama's fiscal plans are these: He
intends to let expire those elements of the 2001 and 2003 tax cuts
that benefit taxpayers with over $250,000 in income; he intends to
preserve all the other elements of the tax cuts, plus add a couple
more for some low-income workers and working seniors; and he
supports the PAYGO budget rules that require new tax cuts and new
spending increases to be offset with an equal amount of tax hikes
and spending reductions.
Put together, these elements make for a coherent budget policy
only if one also abandons the Congressional Budget Office (CBO)
revenue baseline against which PAYGO operates. Refusing to be bound
by the CBO revenue baseline makes eminent sense because, as aptly
described by one of Obama's economic gurus, Austin Goolsbee, it is
"completely unrealistic." On this point Obama and Goolsbee are right,
especially with respect to the CBO revenue baseline. This is why
congressional Democrats have a problem, and it provides further
justification for CBO to fix its baseline.
PAYGO, Baselines, and Baseball
Whether it's baseball, city driving, or federal budgeting, rules
play a central role in determining outcomes. Congress created PAYGO
rules many years ago to bring some order and discipline to the
budget process. PAYGO rules state that tax cuts or certain spending
increases must be matched by an equal amount of tax hikes or
spending cuts. Consequently, PAYGO is the grand defender of the
status quo as it makes popular changes in tax or spending policy
harder to enact.
Making PAYGO operational requires some policy baselines against
which to measure change for both revenues and spending. These
baselines are provided by the CBO.
Goolsbee's comment and Obama's plan tell us that Obama
understands full well that the CBO revenue baseline is
Heads I Win, Tails You Lose
Sometimes the statute governing spending policy expires. Farm
programs expire, as does SCHIP, the highway program, and even
annual appropriations. When CBO constructs its spending
baseline, it sensibly ignores that the statute expires and assumes
instead that current policy--and therefore current spending
levels--will continue because CBO assumes the statute will be
renewed. CBO's revenue baseline, in contrast, is constructed
following the statute and assumes those laws will not be renewed.
CBO's inconsistency in assuming that the expiring laws governing
spending policy will be renewed while those governing tax policy
will not be renewed is unfounded in theory and unfair in practice,
as it creates an inherent bias in favor of higher taxes and higher
Under the flawed CBO revenue baseline, the expiration of the tax
cuts shows up in the baseline as a jump in revenues. This causes
two big problems for Obama. On the one hand, under PAYGO, extending
most of the tax cuts as he suggests would require either a huge
offsetting tax hike or a huge offsetting spending cut. He has
On the other hand, his proposal to let some current provisions
affecting the rich expire raises no money for the Treasury and so
cannot offset his many spending proposals under PAYGO rules. The
CBO revenue baseline puts Obama on the wrong side of a "heads I
win, tails you lose" proposition.
Conservatives have few grounds for agreement with Obama's
agenda, but on these points we should be in complete agreement:
- The CBO revenue baseline is wrong;
- Preserving current law is not a policy to cut taxes; and
- Allowing any of the current law tax provisions enacted in 2001
or 2003 to expire is a tax hike.
Congressional Democrats, on the other hand, disagree with all
three points. And for them, it's a matter not of future policy but
of current legislation. Congress is again faced with extending the
Alternative Minimum Tax (AMT) patch and a slate of other tax
provisions--such as the R&D tax credit--that periodically
expire. Adhering to the CBO revenue baseline, extensions of the AMT
patch and the R&D tax credit are shown as tax cuts. Of course,
as Obama's position makes plain, preserving current policy means
that nothing has changed, so it results in neither a tax cut nor a
But congressional Democrats argue that, under the budget rules,
in order to avoid a tax hike on some taxpayers, they have to raise
taxes on others. This faux fiscal discipline is, of course,
nonsense. Congressional Democrats are merely hiding behind the
rhetoric of fiscal discipline to try to sneak through a massive tax
hike--and then do so again next year and again the year after. If
they believe in raising taxes, they should have the courage of
their presidential nominee and just say so. They are wrong to try
to raise taxes, but they are even more wrong to pretend otherwise
by hiding behind a completely unrealistic CBO revenue baseline.
Joining Forces to Fix the CBO
It is said that politics makes for strange bedfellows. Perhaps
to his own surprise, Obama has apparently joined forces with
conservatives to correct the CBO revenue baseline. Maybe this also
demonstrates that Washington is ready to have an honest debate
about tax and spending policy. A demonstration of that honesty
could start by Congress passing an AMT patch and an R&D tax
credit extension without trying to sneak through a massive tax hike
in the process.
It is past time for Congress to tell the CBO to fix its revenue
baseline methodology. Senator Obama and his people get it. Why
don't congressional Democrats?
J. D. Foster, Ph.D., is Norman
B. Ture Senior Fellow in the Economics of Fiscal Policy in the
Thomas A. Roe Institute for Economic Policy Studies at The Heritage
Richard Rubin, "Candidates' Plans Sketched in
Red Ink," Congressional Quarterly Weekly, January 13, 2008,
quoted in Isabel V. Sawhill, "Candidates on Fiscal Responsibility,"
Brookings Institution, July 30, 2008, at http://www.brookings.edu/~/media/Files/rc/papers/2008/0702_fiscal_
(August 7, 2008).