The Obama Administration and its allies in Congress argue that upcoming tax increases should be prevented for “the middle class” but not for “the rich.” They say we need to prevent tax increases on the middle class, but that we should not extend the Bush tax cuts for the rich.

Team Obama and their Congressional allies make a three-stage argument:

  1. tax cuts should be paid for;
  2. changing the law as Congressional Republicans propose would mean “extending the Bush tax cuts for the rich” and increasing the budget deficit by almost a trillion dollars; and
  3. we need to reduce the budget deficit.

Over the past eighteen months the President, Speaker Pelosi, and House Majority Leader Hoyer have repeatedly stressed the first point. They argue that both spending increases and tax cuts need to be “paid for”: the resulting deficit increase must be offset with other spending cuts or tax increases. This view is generally referred to as two-sided pay-as-you-go, or two-sided PAYGO. In some cases their legislation has abided by this principle: the deficit effects of the health laws and the recent law giving States $26 B were fully offset using CBO scoring. In other cases they have ignored the principle: the deficit effect of the $862 B stimulus law was not offset.

I disagree with two-sided paygo and I disagree with measuring the deficit effects of these tax policies relative to current law. My point today is not to debate whose version of paygo is right, but instead to demonstrate that those who have set the rules are violating them. I am applying their logic and their rules to the policy positions they advocate.

The Administration and its allies are correct that the current law tax increases they propose take effect on “the rich” would significantly increase federal revenue: $970 B over the next decade compared to keeping this year’s tax policies in effect. This $970 B over ten years is the delta between the two parties as they fight about taxes this Fall. If these tax increases take effect and if Congress does not spend them, projected future budget deficits will be $970 B lower than if the law is changed to prevent these tax increases. This $970 B is a very large amount and I don’t want to suggest that the deficit effect is minor. It’s not. You could argue that we should raise taxes on the rich to reduce the deficit, despite whatever negative effects it may have on small businesses, capital investment, and the pace of the economic recovery. I would disagree with you, but today I’m trying to make a different point.

The first argument made by the President and his allies breaks down because they also want to prevent tax increases on / cut taxes for the non-rich. The President proposes that Congress change the law to prevent tax increases that would otherwise reduce the deficit by $3.1 trillion over the next decade. This includes extending both those policies labeled as “Bush tax cuts” for the middle class, as well as policies from the February 2009 stimulus law that the Administration refers to as “middle class tax cuts.”

The President also proposes that the AMT be permanently fixed to prevent it from biting many more middle-income and upper-middle income taxpayers, rather than having Congress do annual patches. You could describe this as a tax cut relative to current law, or as preventing a (stupid) tax increase in current law. However you describe it, this policy change would take $659 B less revenue from taxpayers over the next decade than current law, and would mean deficits that much higher. I support this policy change and I don’t think it should have to be paid for, but I’m also not in favor of two-sided PAYGO.

The Democratic position is therefore:

  • tax cuts should be paid for;
  • Republicans are irresponsible for pushing to “extend the Bush tax cuts for the rich,” meaning preventing all tax increases from taking effect January 1, even though doing so would raise future budget deficits by $4.726 T relative to current law;
  • and yet Congress should “prevent tax increases on the middle class” from taking effect January 1, even though doing so would raise future budget deficits by $3.756 T relative to current law.

The President would have an intellectually consistent argument if he dropped the first bullet. He could argue that preventing tax increases on the middle class is worth the $3.8 T of higher deficits that would result, but that the economic and fairness effects of the tax increases on the rich are not worth another trillion dollars of higher budget deficits. This view would at least be internally consistent.

What the President and his Congressional allies are arguing, however, is that legislation that would prevent tax increases they like must be offset, but legislation that would prevent tax increases they don’t like does not have to be offset. That violates their well-established and much-trumpeted two-sided PAYGO view.

Both sides have violated PAYGO in the past. The whole point of a PAYGO principle is to prioritize deficit reduction over other desirable policies. If you apply a principle to block the policies you don’t like but exempt yourself from it for policies that you favor, then it’s not much of a principle.

Source for revenue estimates: Treasury’s Green Book (Table 1 and Appendix A).

(photo: alancleaver_2000)