CBO: Deficit Projected To Fall If We Assume A Great Many Preposterous Things Will Happen
Plus: Is Obama's Payroll Tax Cut The Hill To Die On?

The CBO is required by law to "project" future deficits according to the current law as written -- even if the current law as written is almost guaranteed to be rewritten in perfectly predictable ways.

They can cook up alternative scenarios making different assumptions, per the request of a Member, but their lead report is just based on the current law.

Based on the current law, the deficit is projected to fall.

But as Ed Morrissey notes, this is based on a series of silly propositions.

Certain provisions of the 2010 tax act, including extensions of lower rates and expanded credits and deductions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and the American Recovery and Reinvestment Act (ARRA), expire at the end of 2012;

The two-year extension of provisions designed to limit the reach of the alternative minimum tax, extensions of emergency unemployment compensation, and the one-year reduction in the payroll tax all expire at the end of 2011;

Sharp reductions in Medicare’;s payment rates for physicians’ services take effect at the end of 2011;

Funding for discretionary spending declines over time in real terms, in accordance with the caps established under the Budget Control Act; and
Additional deficit reduction totaling $1.2 trillion over the 2012–2021 period will be implemented as required under the Budget Control Act.

That the Bush tax cuts will be allowed to expire is the most likely item on this list, and even that is somewhat unlikely. Adjusting the AMT is necessary and has always been done with little argument. The third item -- about the Doc Fix not being enacted next year -- is absurd, as we have delayed the cuts to doctors every two years since we supposedly cut their Medicare payment schedules under Clinton in 1996 or thereabouts.

Regarding the Budget Control Act, the most likely scenario is that neither party agrees to cuts, the automatic cuts go into effect, but then Congress passes a law reinstating most of the money scheduled to be cut from Defense. So the projected $1.2 trillion in cuts there will be closer to 700 billion or so.

Plus, there's the laughable idea that the economy is "expected" to grow by 2.3%. Ed comments:

The CBO estimates that the US economy will finish this year at a 2.3% GDP growth rate for 2011, a neat trick for an economy that has grown at 0.8% in its first two quarters, and at 2.7% in 2012. JP Morgan estimates that it will finish at 1.5% this year and 1.3% next year.

Oh and on top of that there is a very strong possibility we actually enter a negative-growth recession -- or in fact already have entered one.

Those "projected" growth rates hide a lot of deficit. Small changes in the "projected" growth rate increases (or decreases) the projected deficit by very large amounts.

Is it possible that a revised GDP projection (on the heels of the deeply disappointing first and second quarter numbers) will impact the estimates for future government tax revenue and, thus, the outlook for U.S. deficits?

Put another way: What are the budgetary effects of say a 1 percent decline in real GDP growth?

Here is some useful short-hand* on how to think about this issue:

● If GDP comes in 1 percent lower than forecast for one year with a recovery back to the previous trend line shortly thereafter, the U.S. deficit would be roughly $80 billion larger over the ten-year window.

● If GDP comes in 1 percent lower for one year — and this decrease never gets offset with a stronger recovery (i.e., GDP does not jump back up to the previous trend line, so it’s not technically “recovered”), then the U.S. deficit picture would be roughly $650 billion worse over the ten-year budget window.

● If GDP comes in 1 percent lower every year over the ten-year window, the U.S. deficit would increase by more than $3 trillion.

These are all big numbers, especially when juxtaposed with the savings from the BCA. This is why so many policymakers and analysts are focused on growth these days. GDP projections matter more than probably any other variable when trying to estimate how the U.S. deficit picture will look ten years from now.

And that is why the GOP should constantly agitate for the repeal of ObamaCare as both a deficit-reducing and growth-promoting measure -- a "stimulus" in which we save money rather than spend it.

But note how much the deficit will grow if the CBO's "projections" of near-term growth are off by 1% -- and they very well could be off by a hell of a lot more than that, if indeed the economy is double-dipping.

There's an additional interesting item on the list-- the one about Obama's payroll tax cut being permitted to expire. This is intended as a tax cut for the poor, who usually pay no income taxes at all, and only pay towards their own retirement and senior health benefits (and unemployment insurance) in the form of payroll taxes. But of course those taxes do not cover the full cost of those programs, and Obama's payroll tax cut means the deficit between what is paid and what is received in exchange for payment continues to grow.

Obama is demanding we extend this tax cut; Republicans resist that. The poor, as it is, pay no income tax as it is; it seems strange that they should even pay less for their own social welfare programs.

That said, this is a tricky thing -- while conservatives like to argue that "everyone should pay some taxes," Republican politicians do not often mention this on the stump, because no one wants to hear, especially from a Republican, "Dude, you're getting a tax hike."

Rick Perry mentioned this idea in his book FED Up!, that everyone should have skin in the game, but I doubt very much we'll hear it from him in the campaign.

Late last year, Ramesh Ponuru and Reiham Salam published an article about the growing class war within the Republican Party, the tension between higher-income Republicans and lower-income Republicans. They actually propose getting on board with payroll tax cuts for those too poor to pay income taxes, as a manner of attracting lower-income voters (including lower-income independents and "bitter clinger" Democrats).

he tax that falls most heavily on lower-middle-class voters is the payroll tax. Cutting any tax is a tough proposition in today’s fiscal circumstances. But a tax reform that reduces the burden of payroll taxes on young working-class voters who are trying to start families is well within reach: It would merely require increasing the child tax credit and applying it against both income and payroll taxes, replacing the lost revenue by reducing tax breaks. Among the most appealing targets are the state-and-local-tax deduction and the mortgage-interest deduction, both of which mainly benefit affluent households in high-cost, high-tax states.

Such a reform would provide tangible assistance to many lower-middle-class voters — either now or prospectively, when they start families. The vast bulk of parents who pay enough in taxes for a child credit to be worth a significant amount of money are married, and supporting these couples might in a small way address one of the most troubling developments in lower-middle-class life: the ongoing collapse of marriage within that demographic, which is bad for our society and for conservative politicians.

Kevin D. Williamson argues that Obama's payroll tax cut is actually bad policy, but that it's not the hill to die on.

The political trouble here comes when Republicans simultaneously urge the extension of the Bush tax cuts for higher-income taxpayers, but then oppose the extension of a small cut in the payroll taxes designed to help lower-income voters. It's a tricky thing for Republicans to argue we're in favor of keeping tax rates low and leaving money in the pockets of the American citizens in the first instance, but want to raise this other tax.

Obama put us in a neat box on this one. I'm not sure what to do about it.

Lemons, Lemonade: Given that the payroll tax cut actually makes our unsustainable entitlements more unsustainable, by reducing still further the already inadequate funding for these programs -- raiding Gore's metaphorical lockbox, as it were -- some deal could be had in which such taxes were lowered in exchange for equal (or greater) reforms (meaning cuts) to these programs.

But that's not likely to be a plan anyone runs on, either.

posted by Ace at 01:48 PM

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