GOP's Fuzzy Math Misstates CBO Revenue Projections

GOP's Fuzzy Math Misstates CBO Revenue Projections

This article was updated and corrected June 3, 2011

With the House voting 318 to 97 earlier this week against raising the Treasury’s borrowing authority, every Republican and  some  Democrats  were digging in their heels on the idea that trillions of dollars of spending cuts must accompany any rise in the debt limit. Although they repeatedly say that “everything is one the table,” Republicans quickly add that this does not include higher taxes.

Simple arithmetic, however, tells us that a budget deficit and the concomitant increase in debt can result from either higher spending or lower revenues. And indeed, lower revenues are responsible for about half the increase in debt since 2001, according to the Congressional Budget Office.

Since 2001, the national debt has increased $11.8 trillion. This resulted from a $6.2 trillion decline in revenues and a $5.7 trillion increase in spending.  Of the revenue decline, $2.8 trillion resulted from legislated tax cuts and $3.4 trillion from economic and technical factors. On the spending side, almost all of the increase was legislated, with $2.4 trillion of it coming between 2001 and 2008.

Despite the significant contribution of tax cuts to the national debt, Republicans argue that higher revenues are off the table in the debt limit negotiations. In a May 16 floor speech, Sen. Jon Kyl (R-AZ), the assistant Senate minority leader, made this fact clear in no uncertain terms. Said Kyl, “When we are talking about how to get the budget better balanced, how to reduce our deficits, we should not be looking at the revenue side or the taxing side; we should be looking at the spending side.”

A key argument Kyl made is that it is unnecessary to raise revenues because they are already projected to rise substantially in coming years to their historical level of between 18 percent and 20 percent of the gross domestic product. As he explained:

“CBO figures demonstrate that under any of the budgets offered…we will be back to historic average levels of tax collections in just the next few years – something on the order of 20 percent of our gross domestic product. Revenues are not the problem. They are going to be back where they have always been.”

Indeed, if one looks at the latest CBO projections, Kyl is right. They show revenues rising from 14.8 percent of GDP this year – the lowest level since 1950 – to 16.3 percent next year, 18.8 percent in 2013 and about 20 percent of GDP thereafter.

What Kyl neglected to mention is that the CBO is required to assume that all laws presently on the books will be followed to the letter. Therefore, it assumes in its projections that all of the tax cuts set to expire at the end of 2011 and 2012 will lapse permanently and on schedule – no matter how obvious it is that they will be extended.  For example, the research and experimentation tax credit will expire at the end of this year. But it has expired many times in the past and always been renewed. Although there is no doubt that it will be renewed again because it has strong bipartisan support, CBO’s baseline projections presume that the research tax credit will cease to exist for good after Dec. 31.

More importantly, the CBO assumes that all of the Bush tax cuts will expire at the end of next year. By 2014, the end of all expiring tax provisions will raise revenues by 3.8 percent of GDP. Therefore, virtually all of the revenue increase Sen. Kyl says will take place is the result of allowing current tax cuts to expire.

This would be okay if Kyl and the rest of his party were committed to allowing the Bush tax cuts to expire at the end of 2012 and not press for their extension or for additional tax cuts. But everyone knows that this will never happen. It is a 100 percent certainty that Republicans will demand that the Bush tax cuts be extended, just as they did when they were previously scheduled to expire at the end of 2010.

Furthermore, groups such as Americans for Tax Reform and the Club for Growth, which enforce party discipline on Republicans on tax issues, will inevitably insist that failure to support another extension of the Bush tax cuts will constitute the biggest tax increase in history. We know this because that is what they said last year. For example, a Nov. 30 press release from ATR was titled, “One Month to Go Until the Largest Tax Hikes in History.” Members of Congress were told that failure to vote for an extension of the Bush tax cuts was a violation of the tax pledge that virtually every Republican has signed.

Thus we see that Republicans want their cake and eat it too. They want to use higher revenue projections resulting almost entirely from expiration of the Bush tax cuts to prevent any discussion of tax increases to reduce the deficit, while implying that this revenue rise comes solely from faster economic growth. As Sen. Kyl put it, “So revenues are down, but it is due to the recession. We have not cut tax rates in the last few years – since 2006 – for example.”

According to the CBO, ending all of the tax cuts and allowing scheduled tax increases now in law to take effect would raise revenues by $5.6 trillion between 2012 and 2021, including debt service. That would go a long way toward solving our debt problem. In fact, the Center on Budget and Policy Priorities says that this action, by itself, would be sufficient to stabilize the national debt and prevent it from rising as a share of GDP.

It would be highly desirable if President Obama could get Republicans to agree, as part of debt limit negotiations, to commit themselves to allowing the Bush tax cuts to expire so that we will actually get the higher revenues they say makes legislated tax increases unnecessary. Unfortunately, there is almost no chance of this happening because Obama has no more desire to commit himself to a de facto middle class tax increase in 2013 than Republicans.

Related Links:
Treasury Auctions at Risk from Debt Ceiling Impasse (The Fiscal Times)
Ryan Budget Plan Slashes Spending, Lowers Taxes (The Fiscal Times)