Extending JGTRRA and EGTRRA under the CBO’s March 2008 Baseline

There are many moving parts to McCain’s budget policy (see McCain site on the economy, [0]), so I can only undertake a partial analysis. That being said, extension of JGTRRA and EGTRRA is the most concrete, and easy to score, component, exactly because the CBO has already done it.


Figure 1 depicts the impact of making permanent the Bush tax cuts of 2001 and 2003, relative to the March 2008 CBO baseline.


consequences1.gif

Figure 1: Unified budget balance to GDP ratio (blue), baseline (teal), and counterfactual under extension of JGTRRA and EGTRRA (red), by fiscal years. Incremental debt service approximated by prorating the total increments listed in Table 1.3. Balance to GDP ratio incorporating extension of JGTRRA/EGTRRA and growth of discretionary spending with nominal income (green box). Ten-year-out impact ($280 billion) of growth of discretionary spending with nominal income rate from August 2006 Outlook. Source: CBO, CBO’s Estimates of the President’s Budget for Fiscal Year 2009 (March 2008) Table 1.3, and CBO historical data, and author’s calculations.

The most important aspect of this graph is the shift in the budget position relative to the baseline (which incorporates the expiration of the 2001 and 2003 tax cut provisions). That’s because the 2008 baseline is probably already a bit optimistic regarding the budget deficit. Since March, most observers have extended the period of anticipated slow growth, and hence resulting depressed revenues. In addition, while the CBO baseline incorporates adjustment of discretionary spending with the CPI, growth with nominal income is more the rule. While CBO did not report the alternative path when discretionary spending grows with nominal income, I can use the August 2006 10 year end-point impact to gain a (lower bound) estimate on the impact on the budget balance to GDP ratio (the green box). What this suggests to me is this part of the McCain plan would push the deficit to at least 2 ppts of GDP. Of course, these are not the only tax cuts in the plan.


What are the implications for Federal debt held by the public, expressed as a ratio to GDP? Figure 2 depicts the March 2008 baseline (teal), with discretionary spending increasing with the CPI, and GDP growing as in the baseline.


consequences2.gif

Figure 2: Debt (held by public) to GDP ratio (blue), baseline (teal), and counterfactual under extension of JGTRRA and EGTRRA (red), by fiscal years. Incremental debt service approximated by prorating the total increments listed in Table 1.3. Ten-year-out impact ($280 billion) of growth of discretionary spending with nominal income rate from August 2006 Outlook. Source: CBO, CBO’s Estimates of the President’s Budget for Fiscal Year 2009 (March 2008) Table 1.3, and CBO historical data, and author’s calculations.

Once again, what is most relevant is not the actual paths, but the gap between the baseline and the counterfactual. By FY2018, the debt/GDP ratio is a full 10 ppts higher as a consequence of extending the tax cuts. (By the way, I haven’t shown the impact of higher discretionary spending growth, in line with nominal income, but you can get an idea of how that looks in this post).


Now, it is true that I’ve only examined revenue side implications for one component of the McCain plan, although this is sometimes considered the centerpiece (spending cuts that McCain has referred to are not specified, so seem akin to the old “magic asterisk” of days gone by). One can see a more comprehensive examination based upon what the staffs or speeches indicate in a Tax Policy Center analysis (the Tax Policy Center is a joint Urban Institute-Brookings Institution center). That analysis highlights the difficulty of doing an independent scoring of the many other provisions both McCain and Obama have forwarded.


Both the Obama and McCain campaigns have proposed tax cuts relative to current law; according to the Tax Policy Center; the Obama tax cuts amount $2.9 trillion over the FY2009-2018 period (approximately equal to the amount associated with extending the JGTRRA and EGTRRA). Hence, in purely budget revenue terms, the Obama plan has similar implications as extending the JGTRRA/EGTRRA provisions (although clearly the distributional implications are much different, as illustrated by Figure 2 in the Tax Policy Center report, shown at the end of this post).


Interestingly, using the McCain campaign’s own numbers, the McCain plan implies a $4.2 trillion reduction in tax revenues. In other words, both tax plans imply a deterioration of the debt/GDP ratio relative to baseline, but the McCain plan implies a substantially larger deterioration [i.e., $1.3 trillion (45%) bigger]. For those who view the budget deficit as a short and long term challenge, this is an important factor.


Do deficits matter? Should we care? Here are my takes on those questions: [1], [2], [3], [4], and [5].


The CBO’s Budget and Economic Outlook will be released September 9th.

consequences3.gif

Figure 2 from Roberton Williams and Howard Gleckman, “A Updated Analysis of the 2008 Presidential Candidates’ Tax Plans: Executive Summary,” August 28, 2008.

13 thoughts on “Extending JGTRRA and EGTRRA under the CBO’s March 2008 Baseline

  1. GK

    The deceptive thing about Obama’s tax cuts are that the bottom two quintiles pay almost no taxes to begin with.
    A 10% reduction in taxes is not meaningful when the actual tax dollars paid will drop from $10 to $9. Big whoop.

  2. DickF

    GK,
    You touch on part of the problem, but Obama’s plan does not just give a tax reduction for lower incomes he will actually redistribute wealth. It can’t be called a tax reduction because many pay no taxes. The Democrat plans in the past have effectively been redistributions of wealth, but they have hidden this behind a rhetoric of helping the “working poor.” Obama does not pretend that his is doing anything but redistributing wealth. He will raise taxes on the “rich” and give it directly to the “poor” and they won’t even have to hold a sign that says “will work for food.” They won’t have to work.
    But the cruelest cut of all will be the unemployment and obsolete equipment that the Obama plan will cause. Increasing taxes on the “rich” actually increases the tax on the small businessman who files as a partner or sole proprietor. Just about every element of the Obama plan will reduce business income and when you reduce business income it has to come from somewhere. That somewhere will be wages and capital improvements. He will lead us in a huge step toward third world status.

  3. GK

    ” He will lead us in a huge step toward third world status.”
    I wouldn’t go that far. Remember when Clinton raised taxes like this in 1993 – he created 12 years of a GOP congress.
    If Obama actually tries this, he will be voted out in a Carteresque manner.
    The ‘All’ measure in the graph is itself wrong. It is a linear average giving equal weight to all quintiles. It is not a weighted average (which is what it should be).

  4. KevinM

    For what its worth, Obama says he is agaist welfare without work in “Audacity of Hope”. That policy is consistent with the surrounding ideas.
    Reading his books (all of the words) gives a clear picture of where he’s coming from. If you are not from an inner city he isn’t talking about you when he says “we”.
    I believe firmly that rich/poor and black/white take a back seat to urban/suburban in his vision. If you work in a cubicle and live on a half-acre lot, you’re in the crosshairs.

  5. Charles

    Right, Kevin… which is why the only people who are facing a tax hike are those in the top one percent or so. So, if you work in a cubicle and live on a half-acre lot and take home $500,000 a year, you’re “in the crosshairs.”
    The discussion on this thread so far is truly… disappointing. The United States has the largest proportion of poor people in the industrialized nations. Those poor pay lots of taxes, even if not much in income taxes. They may be denied things that others take for granted, like parks and decent schools.
    The leaders of the nation, the people who benefit the most, make–in many cases– no sacrifice. They are willing to make none. They pile debt upon government debt so that their own fortunes can grow. They use government corruptly to line their pockets. Many of them cheat on their taxes, in extreme cases becoming parasites who take but do not contribute a thing.
    Our tax system is the least onerous toward upper income taxpayers of any industrialized nation. It provides the fewest benefits, with the possible exception of Japan. And yet some imagine that they can chip away and chip away and not end up cutting the root of the republic that allows them to live their selfish little lives.

  6. Menzie Chinn

    If I may, the main point of the post is the fiscal profligacy exhibited in a particularly virulent form in the McCain plan. See the Economist‘s Free Exchange post on this subject.

    GK: If you think a few bucks are irrelevant to the impoverished, then consider the middle quartile — even if the percentage effect is small, the dollar effect is large, by that same logic.

    On your critique of Figure 2 from the Tax Policy Center, I believe you are just plain wrong. For instance, the “all” McCain entry is not the linear average of the individual quintile entries. That would be about 3.5, eyeballing the bars, while the “all” bar is about 4.9. Please re-assess.

  7. DickF

    Charles wrote:
    The United States has the largest proportion of poor people in the industrialized nations.
    Please give a source.

  8. Robert Bell

    Menzie: Both this post and JDH’s previous post assert that what is being promised by the candidates will result in higher deficit spending (either through spending increases, tax cuts or both). According to the flexible price monetary model that implies ceteris paribus that real interest rates will rise.
    However, JDH is concerned also about the particular form of the changes in spending and taxes in that an increase in the effective corporate tax rate will discourage the non-residential investment he believes is most important.
    Is there any simple way to guage the relative magnitude of these two effects?

  9. DickF

    Kevin,
    I was being flippant when I said you Obama wouldn’t make someone work for their government check, but in truth his entire ecoomics teams is calling for a return to the New Deal. Most economists who have analyzed the period from 1928-1940 separate it into two distince parts: 1928-1933 the Great Contracton; 1933-1940 the Great Depression. (I do not make this distinction BTW) If you believe that New Deal government make work programs financed out of production are the way to go then Obama’s plan is just what you are looking for.
    GK – Don’t ever forget that the step from the Roaring 20s to the 1928 Market Crash was a very small one. Obama could easily lead us into another Great Depression all the time blaming free markets.

  10. Robert NYC

    Basically wealth redistribution is called socialism. It is not a difficult concept-connection to understand and identify.
    Capitalism and less taxes allows the economic levers of supply and demand to distribute the limited goods across the unlimited wants of society, with the distortions of greater tax levels than that absolutely necessarry to keep some type of economic efficiency causing safety net in place to account for transitional and dislocating forces for the labor factor of production, destroying this efficient allocation method or thereby making it less effective.
    In other words; socialism and wealth-redistribution screws up everything and is counter to what we have learned to date!
    lets all pitch in and send Obama to Econ 101 and see if he learns something!

  11. GK

    “The discussion on this thread so far is truly… disappointing. The United States has the largest proportion of poor people in the industrialized nations. ”
    Except that the ‘poor’ people in America would be considered middle-class elsewhere. The ‘poor’ people in America are shockingly obese, which makes most of the world laugh when sheltered Americans talk about their ‘poor’.
    There are a lot of left-wing groups with a vested interest in propagating this laughable lie.
    “Our tax system is the least onerous toward upper income taxpayers of any industrialized nation.”
    Which is why we don’t have an exodus of productive people, like the UK, France, and Germany have.
    “…..that allows them to live their selfish little lives. ”
    Aha!! The mask of phony concern slips. Socialists like Charles consider themselves generous by taking other people’s money, yet never donates anything himself. Americans, especially right-wing Americans, are far more generous with VOLUNTARY charity than Europeans are.
    Of course, forced re-distribution is more noble than voluntary charity, in the minds of mediocre, envious socialists.
    “If you think a few bucks are irrelevant to the impoverished, then consider the middle quartile — even if the percentage effect is small, the dollar effect is large, by that same logic.”
    Menzie, if one wants to really help the poor, cut Sales taxes, not income tax.

  12. Buzzcut

    Talking about the deficit in terms of revenue is pretty worthless.
    It’s the spending that matters.
    Who do you think will spend less?
    Hint: who called the redistribution of wealth from the young to the old that is Socialist Insecurity “unconscinable”?
    The deficit is being driven by middle class elderly entitlements. Which candidate has the cahonnes to take on the AARP?

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