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[Frenchfry]

Five takeaways from the CBO’s analysis of Obama’s budget
May 18, 2013

For the most part, the description of President Obama’s budget found in the Congressional Budget Office’s analysis of it jibes with the description included in the initial budget release. But the CBO analysis does highlight some interesting features of the proposal. Here are a few.

1. Obama’s tax increases are largely about limiting deductions
For years, Obama has been proposing capping itemized tax deductions at the level of benefit that people in the 28 percent tax bracket get. That means that single people making more than $183,250 and couples making more than $223,050 will get 28 cents back for every dollar of deductions they get, rather than 33, or 35, or 39.6 cents back.

That got a little overshadowed during the presidential contest, when Mitt Romney proposed his own vaguely defined deduction cap proposal. And it made less of a difference when there weren’t high earners paying the 39.6 percent rate, as there are now. But with that rate back in place, and because of chained CPI pushing more people into higher brackets (more on that later), the deduction cap is Obama’s single most important revenue increase. The CBO estimates that the plan will raise $493 billion over 10 years.

For comparison, Obama’s budget raised $974 billion in new revenue over the course of 10 years. The deduction cap represents more than half of that.

2. Chained CPI is as much about raising taxes as cutting benefits


The proposal to change the measure of inflation used for federal programs to chained CPI, which rises more slowly than conventional inflation measures, is usually framed as a Social Security cut. And it is. The CBO estimates that it will save $133 billion in Social Security costs over 10 years.

But it’s also a tax increase. Currently, the cutoffs for different tax brackets rise with CPI-U, a non-chained measure of inflation. Chained CPI would cause the cutoffs to rise more slowly, pushing more and more people into higher tax brackets. That raises $99 billion over 10 years. So about 43 percent of the deficit reduction from chained CPI comes from increased taxes, not spending reductions.

3. Ending wars saves a lot of money
On net, Obama’s budget reduces spending by $172 billion over 10 years, but that includes a number of big cuts and a number of big new spending initiatives. Canceling the sequester and budget caps, for example, costs $970 billion all together, and transportation funding increases, the Medicare “doc fix”, and extending refundable tax credit expansions from the stimulus (to wit, the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit) all cost more than $100 billion apiece.

But that’s more than offset by cuts elsewhere. The single biggest, at $601 billion in savings, is the proposal to “reduce spending on overseas contingency operations” — that is, winding down the wars in Iraq and Afghanistan. The CBO baseline assumes we continue current spending in those countries. Tying up those loose ends does wonders for the overall spending picture.

4. The tobacco tax’s revenue doesn’t fall
One worry, expressed well by Brad Plumer here, about the administration’s scheme to pay for preschool with an increase in the tobacco tax is that you want revenue from such taxes to fall, as they induce people to smoke less and get healthier. That was certainly the picture you got from the administration’s initial budget release, which forecast lower revenue in 2022 and 2023 than upon the tax’s initial implementation.

But the CBO finds the opposite. It finds that the tax raises $7 billion in 2014, $8 billion every year from 2015 to 2019, and $9 billion every year from 2020 to 2023. So its revenue increases over time, rather than decreases. It’s unclear which of these projections is more reasonable, though intuitively Brad’s logic seems sounder than the CBO’s here.

5. Obama already has money for corporate tax reform
The budget proposal includes broad outlines of Obama’s plan for a revenue-neutral corporate tax reform package. That includes making the Research & Experimentation Tax Credit permanent, making a new preferential expensing policy for small businesses permanent, ending “last in first out” inventory accounting and limiting the ability of companies to hold money offshore to defer tax payments. Taken altogether, these proposals raise $66 billion.

Now, to afford a significant rate cut, he’s going to need to cut deductions more than that. The Committee for a Responsible Federal Budget (CRFB) estimates that it costs about $100 billion to reduce the corporate tax rate one percentage point. By that reasoning, the Obama savings would make it possible to cut the rate from 35 percent to … 34.33 percent. That’s not the most dramatic change in the world, but it is a start.
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/05/18/five-takeaways-from-the-cbos-analysis-of-obamas-budget/

[Frenchfry]

This is the only graph you need on Washington’s budget debate

The Congressional Budget Office released their analysis of President Obama’s 2014 budget proposal today. The bottom line? It more than solves our deficit problem for the next decade, and for some time beyond that. And unlike the status quo — which also reduces the deficit, though not by as much — it brings the deficit down gradually over 10 years, rather than reducing it sharply over the next two years and then watching it rise slowly over the next decade.

The Senate Democrats’ budget and the House Republicans’ budget also bring deficits down to more-than-manageable levels through the mid-2020s. But the best part of the CBO’s analysis isn’t in their report. It’s a chart CBO Director Doug Elmendorf put on his blog that offers an unusually clear look into how the three budgets differ — and how they don’t:



The first thing you’ll notice: All these budgets look pretty similar. In fact, the Senate Democratic budget looks almost identical to the White House’s budget. If you showed a Martian this graph, they would not think Washington is a particularly divided place.

But pay close attention to where the White House and the House Republicans actually diverge. It puts the lie to a lot of what the two parties want you to think they’re arguing about.

For reasons related to both coalition politics and polls, Democrats and Republicans tend to fight over taxes, Social Security and Medicare. But that’s not where their budgets really disagree. Over the next 10 years, spending on Medicare and Social Security is almost identical across the plans. Taxes offer more of a contrast: President Obama’s budget envisions them sixth-tenths of a percentage point of GDP higher than the Republicans do. Defense spending also differs, and cuts against the narrative that Democrats always want to spend more and grow government while Republicans want to spend less and shrink it: Republicans want to spend more on defense than Democrats.

But the real difference comes in government spending on everything that’s not Social Security, Medicare or defense. The difference there is 1.5 percent of GDP — which is almost three times the size of the difference on taxes. It’s 15 times — yes, 15 times — the difference on Medicare and Social Security.

That spending includes everything from Medicaid and Obamacare to food safety, education, infrastructure, housing subsidies, the court system and the FBI. The GOP’s deep cuts there are required if they’re going to fulfill their disparate goals of balancing the budget while holding taxes low and letting defense spending rise.

The question, of course, is why those are their goals. There’s no pressing need to balance the budget in the next decade. Ryan’s 2013 budget, which his fellow Republicans supported enthusiastically, didn’t balance until 2038. And if you believe, as Republicans claim to, that the growth of government is really a story of out-of-control entitlement programs, it doesn’t make sense to spend the next 10 years cutting the non-Medicare and Social Security programs part of the budget. As for taxes, if you believe, as Republicans again claim to, that tax expenditures are equivalent to spending, then it’s unclear why they can’t be cut to reduce the deficit — a decision that would unlock a bipartisan budget deal.

The White House’s budget raises some similar questions, though since its choices are less extreme, the questions are less stark. But a core truth of their budget is they’re bringing non-Medicare, Social Security and Medicaid spending to historically low levels. It’s not a budget that’s consistent with the “Sputnik moment” rhetoric that the administration often favors. Their budget is a lot rougher on the categories of spending that aid social mobility and “winning the future” than it is on, say, Social Security.

All that said, this graph puts the lie to much of Washington’s budget debate. In terms of actual dollars over the next 10 years, the two parties are not arguing over Medicare and Social Security. And they’re not even arguing over taxes or defense, for the most part. Their biggest argument is over everything else.
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/05/17/this-is-the-only-graph-you-need-on-washingtons-budget-debate/