Scoring McCain’s Tax Proposals

Len Burman and Douglas Holtz-Eaton exchange views with Len leading off assisted by Greg Leiserson who estimate the cost of McCain’s proposed tax cuts:

Even with the loophole closers, these proposals would reduce federal revenues by about $5.7 trillion over ten years if they could be enacted immediately. Under a more realistic assumption that they don’t take effect until October 2009, the cost would be about $5.4 trillion … Cuts this size would pare government back to levels not seen since the Eisenhower administration. In FY 2012, tax revenues would be reduced by about $550 billion compared with current law (with the tax cuts expired). That is roughly equal to CBO’s baseline projection for all nondefense discretionary spending. McCain’s proposal is $300 billion bigger than all of President Bush’s FY2012 tax cut proposals. Tax revenues would be about 16.8 percent of GDP. By comparison, spending this year is about 20 percent of GDP … These estimates make one thing clear. Senator McCain plans a radical downsizing of government. Slashing pork, earmarks, and underperforming programs would offset only a fraction of the revenues. Cuts the size of those he proposes will require slashing discretionary spending and entitlements, and probably even reining in defense spending. Small wonder he has backed away from his earlier pledge to balance the budget—meaning that these tax cuts, like the ones signed by President Bush, will be paid for by our children.

Douglas goes on the offensive again by trying to suggest the above is somehow misleading. His first argument is really not an argument at all:

At the broadest level, the problem is that the Center focuses on taxes in isolation, while the impact of Senator McCain’s proposal must take into account changes on the expenditure side as well. He has proposed specific discretionary cuts to offset the historic practice of waste and earmarks, a one-year discretionary “pause” (freeze) of spending outside of necessary military and veterans accounts, an overall program review that would encompass defense procurement plans and methods and non-defense programs, and a comprehensive health care reform that is the foundation for addressing the budgetary stresses from entitlements.

But the discussion from Burman and Leiserson did consider the expenditure side. Then there is this bait and switch:

The scoring is dramatically influenced by the adoption of unrealistic congressional budgeting conventions. An analysis grounded in sound economics would evaluate the impact of tax and spending proposals that change the current course of policy … In contrast, the Tax Policy Center uses the congressional baseline, which reflects current law and not current policy.

If this sounds all too confusing, Paul Krugman is here to help:

Holtz-Eakin’s reply involves, in part, claiming that the proposals are a “vision” rather than something to be specifically implemented. Oh-kay. But what really got me was Holtz-Eakin’s complaint about “the adoption of unrealistic congressional budgeting conventions.” This takes some explaining. When “scoring” tax proposals, Congress asks how they would change revenue from what it would have been otherwise — that is, it’s done against a baseline of current policy. And current policy is defined as what the current law says. Now, this has caused problems, largely because the Bush administration deliberately used that convention to hide the irresponsibility of its tax plans. The 2001 tax cut was scheduled to expire at the end of 2010, not because this was actually intended to happen, but to make the 10-year projected cost lower. And the Bush administration didn’t include the price of an AMT fix, even though it was clear one would be necessary. What Holtz-Eakin wants us to do is to consider all of this water under the bridge. The Bush administration faked its numbers by pretending that it wanted the tax cut to expire — but hey, they didn’t really mean it, so we shouldn’t consider extending the Bush cuts as something that imposes any new revenue loss. The Bush administration pretended that nothing needed to be done about AMT, but hey, everyone knows that was fraud, so we shouldn’t consider abolishing the AMT a real cost. So most of the McCain proposal isn’t really a tax cut! This is sophistry — and Holtz-Eakin knows it. Proposing to extend past unaffordable tax cuts has the same effect on the budget as proposing new unaffordable tax cuts. The bottom line is that the combination of the Bush tax cuts and McCain’s extensions and revisions would leave the federal government without sufficient revenue to do its job; no amount of bobbing and weaving can change that fact. And it’s really sad to see Holtz-Eakin lending his reputation to this sort of thing.

McCain’s fiscal proposals are a recipe for a continuation of the escalation of the Federal debt to GDP ratio. It is ashamed that the former CBO chief has decided to prostitute himself for this fiscal irresponsibility.