Thursday, January 3, 2013

Obama’s Paradoxical Presentation On The ‘Fiscal Cliff’ Deal

(By Glenn Kessler, Washington Post, 2 January 2012)

“We stopped that middle class tax hike. But we didn’t stop there. …Last year we started reducing the deficit through $1 trillion in spending cuts. And the agreement we reached this week will reduce the deficit even more by asking the wealthiest two percent of Americans to pay higher taxes for the first time in two decades.”
— President Obama, Jan. 2, 2013, in a video for supporters

“American Taxpayer Relief Act Reduces Deficits by $737 Billion”
— headline on a White House blog post

We’re back from vacation and, like many Americans, have been trying to figure out the details of the “fiscal-cliff” deal — one of those classic middle-of-the-night congressional compromises that please virtually no one.  The White House, by its own accounting, ended up with $737 billion in deficit reduction, a far cry from the $2 trillion or so that it originally sought. But that hasn’t stopped President Obama from touting the deal as a victory in a campaign-style video for supporters.  But a politician who highlights good news often leaves out the bad news. Let’s see what’s missing from Obama’s presentation.
The Facts

As we have noted before, The Fact Checker covered the passage of the Bush tax cuts in 2001, which were originally promoted as a way to deal with the looming problem of having too little national debt. (Oops.) The most striking thing is that the deal permanently locks in place virtually all of those tax cuts — something that Democratic leaders had once said would be an economic travesty.   The Bush tax cut was structured to expire after nine years, in part to hide its true cost, and Democrats declared at the time they would trim it back in future years. In the midst of the economic downturn, Obama extended it for two years, but vowed he would reinstate the top two tax rates that existed in the Clinton administration.  In the end, he had to settle for just boosting the top tax rate, as well as nibbling around the edges on capital gains, personal exemptions and itemized deductions.
In other words, Republicans could have framed the vote as a huge victory, achieving a long-sought goal of permanently extending virtually all of Bush’s tax cuts. And Democrats could have viewed the outcome as a giant drain on the deficit — as they once did.  Indeed, after the Bush tax became law, Rep. Charles B. Rangel (D-N.Y.), then ranking member on the House Ways & Means Committee, asked the nonpartisan Joint Committee on Taxation to assess the true revenue loss of the tax law, assuming various provisions did not expire as scheduled. The answer: $1.8 trillion over ten years. He trumpeted that fact in a news release.

Now, here’s what the JCT pegged as the revenue loss of this week’s deal: $3.8 trillion over ten years. (Rangel voted for the bill, calling it “a victory for American families and the economy.”)  So how does the White House claim that it achieved $737 billion in deficit reduction? That’s because Obama is measuring the outcome against the anticipated revenue loss if none of the tax laws had changed, even though the Bush tax cuts actually did expire on Jan. 1. (He was certainly aided in this subterfuge by constant GOP complaints that he was seeking a massive tax hike.)  This is known as the difference between “current policy” and “current law.” Current policy assumes laws will be extended, even if they are due to expire. The Joint Tax Committee measures the deal against current law, while the White House blog post offers a chart that is measured against the Congressional Budget Office’s “alternative fiscal scenario” (in other words, current policy).
One of the biggest revenue drains was a decision to permanently index the alternative minimum tax to inflation. The AMT, intended to hit the wealthy, has never been tied to inflation—and then the Bush tax cuts exacerbated the problem by cutting tax rates so much that more middle-class Americans were snared by the AMT. So every year, Congress had to enact a temporary fix.  Just indexing the AMT to inflation reduces projected revenue by nearly $900 billion. But indexing the AMT and extending virtually all of the Bush tax cuts doubled the price tag to $1.8 trillion. Yet because CBO assumed such a step would be taken in its alternative scenario, the White House is able to assume the impact on the deficit was exactly zero dollars.

The same goes for three tax provisions that were part of the stimulus law; they add to the deficit by $134 billion, including $78 billion in spending, but because they were also included in CBO’s alternative scenario, the White House can also claim they contribute nothing to the deficit.  Paradoxically, the end of the payroll tax holiday — which will raise taxes on every working American — gets Obama no credit for deficit reduction, even though it raises more than $100 billion a year, because CBO assumed it would expire.  Thus, Obama can claim he prevented a middle-class tax hike, even though, during the presidential campaign, that payroll tax cut accounted for more than half of his claim that he cut taxes by $3,600 for a ‘”typical middle class family.” Indeed, it is still touted on the White House Web site as a tax cut.
The Pinocchio Test

Since both sides seem to have tacitly decided the right measure for this deal is current policy, not current law, we initially were not sure if Obama’s presentation was worthy of Pinocchios. But there is something very paradoxical about the story line here.  In effect, Obama is arguing that eliminating tax cuts for the wealthy reduces the projected deficit, but keeping tax cuts for all other Americans — and even fixing the alternative minimum tax — has no impact on the deficit. At the same time, eliminating a tax cut for everyone (the payroll tax holiday) is neither a tax hike nor a deficit-reducer, because it was deemed to be temporary, even though every previous AMT fix had been temporary as well. The net effect is to maximize the impact of the tax hikes on the wealthy, and minimize the tax hikes on everyone else.
For too-clever political jujitsu, Obama earns one Pinocchio.

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