The ratio of spending cuts to tax increases in the President’s budget

The ratio of spending cuts to tax increases in the President’s budget

The Obama Administration claims their new budget contains $2.50 of spending cuts for every $1 of tax increases.  Here is White House Chief of Staff and former Budget Director Jack Lew on Meet the Press yesterday:

We’ve seen from Republicans in–particularly Republicans in the House, but with Republicans generally, that they don’t want to be part of any plan that raises taxes at all. The president’s budget has $1 of revenue for every $2 1/2 of spending cuts. This can be done, but it can only be done when we work together.

Their 2.5:1 ratio is bogus. The President’s team is (1) playing a timeframe game and (2) counting interest savings from tax increases as spending cuts.

Contrary to Mr. Lew’s assertion, the President is proposing at least $1.20 of tax increases for every dollar of proposed spending cuts. The President’s budget locks in historically high spending levels and relies more on tax increases than spending cuts for the limited deficit reduction it proposes.

Table S-3 from the newly released President’s Budget starts measuring deficit reduction a year ago, in January 2011.  The table shows $5.3 T of deficit reduction over the next ten years resulting from a combination of laws enacted last year and the President’s new proposals released in today’s budget.

The President’s budget is a set of policy proposals for the future.  When most people hear the “The President’s budget has $1 of revenue for every $2 1/2 of spending cuts,” they think this ratio applies to the changes the President proposes for the future.

I will therefore split the OMB table and recalculate this ratio, ignoring spending cuts and tax increases that have already been enacted into law and looking only at future policy proposals.  I argue this is the right way to do this ratio.  Like the OMB table, this one shows deficit reduction for the next 10 years ($ in billions, 2013-2021).

Already enacted

New proposals

Total

spending cuts

1720

1254

2974

tax increases

1510

1510

interest effects

800

total deficit reduction

1720

2764

5284

spending / taxes

0.83

2.50

taxes / spending

1.20

Looking only at new proposals, the President’s budget proposes 83 cents in spending cuts for each dollar it proposes in tax increases.  Or we could say the President’s budget proposes $1.20 in tax increases for each dollar in proposed spending cuts.

The gimmicks

The President’s team is playing at least two games to generate their 2.5:1 ratio:

  1. They are cherry-picking their timeframe to make the ratio look at high as possible; and
  2. They are counting all interest savings as spending cuts.

Why did they start measuring in January 2011?  Because that was the start of the Republican Congress, because last year only spending cuts were enacted, and because that timeframe maximizes the spending increase to tax cut ratio.

Good rule of thumb:  if you cut government spending or raise taxes by $100 over the next ten years, you’ll also save about $20 in interest costs. These interest savings show up as reductions in government spending even when they result from tax increases.  If, for instance, the President proposed no spending cuts and $100 B of tax increases, he’d get scored with $20 B of interest savings which would show up as reductions in spending.  Using Team Obama’s logic that would count as a 5:1 ratio of tax increases to spending cuts even though common sense would suggest the ratio is infinite because the President isn’t proposing to cut any spending.

The right way to measure this ratio is therefore to exclude the interest effects and to measure only the ratio of deficit effects of proposed policy changes.  The Administration counts interest savings from tax increases as spending cuts to inflate their ratio.

The Administration may also be playing games with how they define spending cuts and tax increases.  I have not yet looked into their details on this point.

This ratio is a stupid measure

Even when it’s not distorted by games like these, the ratio of spending cuts to tax increases is a misleading way to analyze fiscal policy for two reasons.

  1. Both the numerator and the denominator measure a change rather than an absolute level. But for both spending and taxes the change that you measure depends on the starting point you pick. Even well-intentioned people can disagree on the right baseline from which to measure spending cuts or tax increases. In addition, it is easy to gimmick the starting point for either measurement to make the change look big/small as needed. Both the discretion involved in choosing spending and tax baselines and the opportunities for gimmickry mean that both the numerator and denominator of this ratio are at best somewhat arbitrary and at worst just made-up numbers.
  2. What kind of ratio of spending cuts to tax increases you should want depends not only on your fiscal policy views, but also on the starting point.  Most people would say that if government spending is historically high then it makes sense to rely more on spending cuts than tax increases.  Saying we need “a balanced approach to deficit reduction” and using this ratio (even when properly calculated) presumes the current starting point for policy is good or at least reasonable. With government spending starting way above the historic average that’s a huge assumption.

The political strategy of emphasizing this ratio

I think that by using this distorted 2.5:1 ratio, the President’s team wants you to conclude:

  • that the President is a reasonable fiscal policy centrist who believes in reducing the deficit through a balance of spending cuts and tax increases;
  • that his proposed balance relies much more heavily on spending cuts than tax increases; and
  • that Congressional Republicans are therefore unreasonable and extreme for rejecting the President’s “balanced approach.”

When we look at the corrected ratio of $1.20 of tax increases for $1 of spending cuts, measured relative to a starting point of historically high government spending, we see the Obama Administrations actual fiscal strategy revealed.

  • The short-term logic is, “Republicans got their spending cuts last year. Now it’s our turn to restore balance by relying mostly on tax increases to reduce future deficits.”
  • The long-term goal is to lock in as high a level of government spending as possible and to rely principally on tax increases for deficit reduction.
  • But since neither of these will sell to a center-right American public, they created a new way to measure this ratio and hope you won’t pay attention to the details.

Despite the Obama Administration’s rhetoric, the president’s budget relies more on tax increases than on spending cuts for the limited deficit reduction it proposes.

(photo credit: NBC News)

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