More Than 90 Percent of the Fiscal Cliff Bill’s Cost Is from Tax Cuts
CBO Says the Bill Cut Taxes by $3.7 Trillion, Plus Cost of the Refundable Credits
I said last week that I would comment on the implications of the “fiscal cliff” bill for the next round of federal budget debates, and I want to follow through on that promise/threat. Today’s blog post lays the foundation for that discussion by examining the magnitude of the tax changes in the bill, illustrated in the following pie chart.
Although most fiscal conservatives look at the bill as a tax increase, the Congressional Budget Office (CBO) usually describes it as a multi-trillion tax cut, and not simply because it was passed and signed in 2013. The CBO generally measures the fiscal impact of legislation relative to current law at the time of the estimate, not based on current policy at that time. In other words, they calculate the fiscal effect compared to what would have happened without the legislation. Since the “current law” (up until last week) provided for large tax increases and spending cuts in 2013, the CBO says that the various provisions extending tax breaks or making them permanent create a huge increase in the federal deficit, relative to what it otherwise would have been.
According to the CBO, the bill increases the deficit by $4.0 trillion over the next ten years (plus another $600 billion from greater interest costs for the increased debt). As our pie chart shows, about $3.7 trillion is from the tax changes (excluding refundable credits), and only $300 billion is from increased spending. And most of the latter category of costs is from the 5-year extension of the improvements in tax credits for low-income families, because refundable credits are counted as spending.
Of course, that isn’t the only way to look at the costs. The CBO concedes the point that one could also measure the bill’s fiscal impact relative to what would have occurred if tax and spending policies that were in effect in 2012 (and 2011 in the case of the AMT) had been continued in 2013 and beyond. Viewed that way, the tax changes in the bill raise tax revenue by about $600 billion to $700 billion over the next ten years, and decrease the deficit during that period by $700 billion to $800 billion – after additional interest costs are accounted for.
To frame the issue in a slightly different way, the CBO says that indefinitely extending all of the income and estate tax measures and indexing the AMT for inflation were expected to cost roughly $4.5 trillion during the period 2013-2022. The measures that were just enacted will cost about $600 billion to $700 billion less. Viewed in that way, one can see that the proponents of continuing the tax cuts got about 85% of the dollar value of what they were seeking.
The debate between those perspectives isn’t the point of this commentary, because I think each of them is valid and important. The point is simply that the spending changes in the bill – in contrast to the tax changes – are relatively small because they are either very short term or are offset by spending cuts.
President Obama and other Democrats who agreed to the deal won some important concessions, as I outlined in a blog post last week, but by agreeing to allow 85% of the tax cuts to be extended (permanently in most cases) they gave up a tremendous amount of leverage without having resolved much of the spending debate that lies ahead.