Why Obama Can Cut the Deficit in Half

Over the past couple of days, I’ve been explaining to reporters that President Obama’s claim that his Administration will “cut the deficit in half” in four years is in fact credible. It’s quite easy to see, in theory/on paper, how one could come up with a policy mix consistent with that goal. And the President himself has been very up front in explaining how that theory works, both during the campaign and since his inauguration.

The policy math is easy, as the Congressional Budget Office’s budget projections demonstrate. Under current law, the 2001 and 2003 tax cuts expire after December 31, 2010, and the Alternative Minimum Tax, still unindexed for inflation, continues to dip deeper down into the income distribution. As a result, under current law, CBO projects that the fiscal year 2013 deficit won’t be just half of the current fiscal year’s $1.37 trillion deficit (which includes the cost of the recovery package); it will be just $285 billion–or just over one fifth of the current year deficit.

Say you want to continue tax breaks for the “middle class” though–as President Obama wants to do. CBO estimates that extending the middle-income components of the 2001 tax cuts would cost $140 billion in 2013 (about half the cost of extending all of the 2001 and 2003 cuts). Continuing AMT relief would bring the total cost of extended tax relief in 2013 to $303 billion and the total deficit in 2013 to $588 billion. Hey, that’s closer to half of this year’s $1.37 trillion deficit, isn’t it?

The President is being honest in laying out his budget strategy by not pretending that he can afford to extend the entirety of the Bush tax cuts-- given the new spending he wants to do and even if that new spending were to adhere to (at least the spirit of) pay-as-you-go rules. If the entirety of the Bush tax cuts and AMT relief were extended, CBO estimates that the 2013 deficit would rise to $708 billion (slightly more than half of this year’s deficit, without any additional spending).

But I worry about how that honesty on tax policy is being framed/messaged. It still sounds like the old debate over the “Bush tax cuts”; which parts we should keep versus which parts we should let expire. Here’s how the President put it Tuesday night:

In order to save our children from a future of debt, we will also end the tax breaks for the wealthiest 2 percent of Americans.

But the fact is that the President and the Congress don’t have to “end” those tax breaks. Those tax breaks are already going to end under current law. The President and the Congress only get to start (pass) new tax breaks.

So I think that President Obama should be emphasizing those new tax breaks for those 95 percent of Americans that his budget will propose, rather than reminding Republicans in Congress that the old (and failed) Bush tax cuts will be going away.

Reminding those Republicans that one doesn’t like (and probably never liked) the “Bush tax cuts for the rich” will only bring back that rhetorical, politically-charged Republican line on “the largest tax increase in American history.” Then you can forget obtaining bipartisan agreement on that tax increase. I don’t know how we could expect that vote to go any better than the vote on the recovery package.

President Obama seems to know this will be coming. Immediately after his acknowledgment about raising taxes on the rich, he said:

Now, let me be clear. Let me be absolutely clear, because I know you’ll end up hearing some of the same claims that rolling back these tax breaks means a massive tax increase on the American people. If your family earns less than $250,000 a year, a quarter-million dollars a year, you will not see your taxes increased a single dime. I repeat: not one single dime.

In fact — not a dime.

In fact — in fact, the recovery plan provides a tax cut — that’s right, a tax cut — for 95 percent of working families. And, by the way, these checks are on the way.

That’s the same defensiveness on the Bush tax cuts we’ve heard all too often among Congressional Democrats over the past eight years. I would think the President can and should take a bolder, braver position. In his GOP response, Governor Jindal indicated the Republicans still are incapable of seeing deficit-financed tax cuts as having anything to do with our deficits:

Democratic leaders say their legislation will grow the economy. What it will do is grow the government, increase our taxes down the line, and saddle future generations with debt. Who among us would ask our children for a loan, so we could spend money we do not have, on things we do not need? That is precisely what the Democrats in Congress just did. It’s irresponsible. And it’s no way to strengthen our economy, create jobs, or build a prosperous future for our children.

Yet the Republicans cheered at the President’s remarks on fiscal responsibility on Tuesday night (this from the transcript vs. prepared remarks):

And there is, of course, another responsibility we have to our children, and that’s the responsibility to ensure that we do not pass on to them a debt they cannot pay. That is critical. [CHEERS from both Republicans and Democrats]

I agree, absolutely.

See, I know we can get some consensus in here.

With the deficit we inherited, the cost of the crisis we face, and the long-term challenges we must meet, it has never been more important to ensure that, as our economy recovers, we do what it takes to bring this deficit down. That is critical…

So I think what President Obama and the Democrats in Congress need to do is stop talking about ending “the Bush tax cuts.” Start talking about moving forward with tax policy in a fiscally responsible and fair way, so that we are committed to paying for all the new and critically-needed investments our citizens and elected officials are interested in pursuing in a genuinely bipartisan or “post-partisan” way.

The substance of what the Obama Administration wants to propose for tax policy need not change very much; I think it’s largely a question of how to frame and message it. And look at who we have to handle that message! He can do it.

Comments

[John Lounsbury:]

Diane - - -

I am skeptical regarding the advisability of the deficit reduction goal. Obama needs to study The Great Depression. One of Roosevelt’s mistakes was to prematurely move to reduce deficits by raising taxes in 1937. The recovery had insufficient traction to absorb this and the country went back into recession through 1938.

Deficit reduction is required, but the timing could be critical. If we tighten down too soon, the recovery from this recession (or worse) could be stalled and/or reversed.

Fiscal policy can not be rigid in these uncharted waters (uncharted since World War II).

Feb 26 10:18 AM

[kelm:]

An interesting analysis. I am looking forward to seeing the details. The President stated Tuesday night that they had already identified $2 trillion in worthless programs over 10 years. It will be interesting to see what they are and if he can actually get anything ended. I do question the assumption on deficits going forward though. Specifically whether their economic assumptions are too rosy.

He may not be able to do it but, he is at least making a full fledged attempt.

Unfortunately, the Republican party has apparently not re-assessed their "spend what you don't have policy". I say unfortunately because America needs the leadership and intellectual resources of all of our legislators to get the country back on track. If one party is still stuck intellectually in failed policies we will not get very far.

Feb 26 10:26 AM

[User 1932:]

did you read that on a bumper sticker? Read Ed K's comments............an... feedback on that?


On Feb 26 10:26 AM kelm wrote:

> An interesting analysis. I am looking forward to seeing the details.
> The President stated Tuesday night that they had already identified
> $2 trillion in worthless programs over 10 years. It will be interesting
> to see what they are and if he can actually get anything ended. I
> do question the assumption on deficits going forward though. Specifically
> whether their economic assumptions are too rosy.
>
> He may not be able to do it but, he is at least making a full fledged
> attempt.
>
> Unfortunately, the Republican party has apparently not re-assessed
> their "spend what you don't have policy". I say unfortunately because
> America needs the leadership and intellectual resources of all of
> our legislators to get the country back on track. If one party is
> still stuck intellectually in failed policies we will not get very
> far.

Feb 26 10:57 AM

[jack kreg:]

If my tax rates go up permanantly next year or the following, I call that a tax increase. One of your main points is to stop talking about this tax increase as if it is not, because it is just another lapse of the new Congress, that is a failure to make permanant the current tax rates.

So, if you want to look the other way, and talk about tax cuts for people who dont pay taxes, then I would say your more politician than your training (advanced degree in economics) would suggest.

Feb 26 11:04 AM

[henarl:]

A tax increase (or eliminating a tax cut) on the highest earning 2% will not be a bipartisan issue in Congress but the Democrats have the votes to jam it thru the House anyway and they will. Whether it passes the Senate is another story - we'll see.
Even if that tax increase becomes law however, that alone will not cut the deficit in half in four years without big spending cuts and Congress has never been good at doing that, whether Democrat or Republican. I think Obama knows that and just lied about cutting the deficit in half to maintain his high popularity numbers so he could get the rest of his programs thru Congress.

Feb 26 11:23 AM

[PainfullyAware:]

There is no difference in action between the two parties. The Republican/Democrat Paradigm Is Fantasy. They are one - The Money Party or Corruption Club.

It seems to me his promise to half the deficit is more like the used car salesman telling you the car is half off the list price. Makes you think you are getting a deal when in fact nothing has changed.

Unless the Government begins to use the actual accounting methods they impose on industry there will be no true measure.

On Feb 26 10:26 AM kelm wrote:

> An interesting analysis. I am looking forward to seeing the details.
> The President stated Tuesday night that they had already identified
> $2 trillion in worthless programs over 10 years. It will be interesting
> to see what they are and if he can actually get anything ended. I
> do question the assumption on deficits going forward though. Specifically
> whether their economic assumptions are too rosy.
>
> He may not be able to do it but, he is at least making a full fledged
> attempt.
>
> Unfortunately, the Republican party has apparently not re-assessed
> their "spend what you don't have policy". I say unfortunately because
> America needs the leadership and intellectual resources of all of
> our legislators to get the country back on track. If one party is
> still stuck intellectually in failed policies we will not get very
> far.

Feb 26 01:45 PM

[P. Kalven:]

A study of Presidential History will show that a President with strong popular support can get things done because he has the most powerful tool in the arsenal of democracy, contrary to the general tenor of remarks I read in SA. Furthermore Obama has chosen to put himself on the line by laying out his objectives and taking responsibility.

Will he get all of his objectives done? Have any of us?

What I observe is an effort to take on leadership in the situation.

What is lacking in the tone of the remarks I see here throughout SA is an understanding of the energy behind this situation and where that energy is directed. Reality has pushed the partisan perspective aside on both sides of the aisle and as this situation plays itself out I envision significant change in the economic landscape and a people motivated to turn their energy towards recovery.


On Feb 26 08:21 AM ED K wrote:

> The reason I don't believe he can do it ,is he does'nt have control
> of the government and not even his own party.I believe he's actually
> given control to Pelosi and Reid.
>
> To support my contention consider this,in the proposed 2009 budget
> there are 9000 pork projects, was'nt it the president that pledged
> he would eliminate pork?In addition there is a $400 billion budget
> supplement up for a vote,Harry Reid has $100 million in pork for
> his district.
>
> Combine these facts with the continued downward spiral of the economy
> and I think you will come to a different opinion than the one the
> government has presented.

Feb 26 02:05 PM

[Jim Hawthorne:]

Since when did the Executive Branch ever have 'control of the government'? Our system of checks and balances is supposed to ensure movement towards 'consensus' rather than 'control'.

As others have stressed, Obama has taken on a task as awesome as any assumed by any President at any time in our history. Timing and execution (as John Lounsbury points out) are is as important as strategy and tactics.

Unfortunately, what seems to be lacking in Washington is the will to eschew partisan bickering and get down to the tough job of finding workable, pragmatic solutions, and to hell with both the Democratic base and Rush Limbaugh.

Today's economic crisis represents a 'clear and present danger' to our nation and to our way of life. That trumps ideology every time.

On Feb 26 08:21 AM ED K wrote:

> The reason I don't believe he can do it ,is he does'nt have control
> of the government...

Feb 26 03:12 PM

[mediapro:]

You really should read the article before you comment. There is no need to jam anything through either house. As the article correctly states, the Bush tax scheme will EXPIRE in 2010. No more of this wealth transfer from the middle class to the wealthy.

Why do I say wealth transfer? Consider the following four giant effects on tax policy that those who only look at the income tax seem to conveniently forget:

1. Our effective cost per gallon of gas is ~$10.00 when one factors in the roughly $30 billion dollars in tax subsidies ANNUALLY provided to the oil and gas industry. This is the most egregious, downscale tax imaginable. Moreover, the oil and gas companies simply need to bid and secure future leases and INTENT to drill for the largess we reap upon them every year. This ponzi scheme against the American taxpayer is one of our dirtiest tax secrets.

The attempted movement away from an oil-based economy is long overdue. Eliminating these subsidies and replacing them with a carbon tax and offsets would be a dandy replacement for current outlays while returning the investment towards modernizing the electrical grid and smart energy technologies while contributing towards deficit reduction. Even an oil guy as purile as T. Boone Pickens has attempted to wake up and smell the coffee.

2. Add to that tax subsidy the protectionist import rules on sugar, milk, etc. Removing sugar tariffs alone and replacing this supply with a much more efficient cane sugar ethanol source could end the corn producer/fertilizer manufacturers stranglehold on the taxpayer's neck. If one wants to make the small farmer argument, then set resdiency, gross receipts and size requirements on farm subsidies. This reward for planting inefficient crop supply and for NOT PLANTING crops drawfs even the oil subsidies.

3. For people who don't count the payroll, FICA, SUI, etc. automatic worker payroll contributions while conveniently ignoring the offshore accounts, shell businesses, and other manipulative uses of the tax code by those who can afford tax attorneys, don't be so quick to condemn the extra pittance through earned income tax credits, adjusted rate schedules for wage earners and such put into the pockets of those who actually contribute a day's labor for a fair wage vs. the incredible sums paid to those who move money through the system. Look where that system of rewards has put us.

4. Finally, would someone please explain to me why there is a ~$100 K cap on wage contributions to Social Security?

Are you considering these tax subsidies to the wealthy when you make your observations? And please realize that the 2011 marginal tax structure would be basically returning marginal rates to those that existed at the end of Reagan's term of office?



On Feb 26 11:23 AM henarl wrote:

> A tax increase (or eliminating a tax cut) on the highest earning
> 2% will not be a bipartisan issue in Congress but the Democrats have
> the votes to jam it thru the House anyway and they will. Whether
> it passes the Senate is another story - we'll see.
> Even if that tax increase becomes law however, that alone will not
> cut the deficit in half in four years without big spending cuts and
> Congress has never been good at doing that, whether Democrat or Republican.
> I think Obama knows that and just lied about cutting the deficit
> in half to maintain his high popularity numbers so he could get the
> rest of his programs thru Congress.

Feb 26 06:20 PM

[fireball:]

so we go after the richest 2%. by what right? after we're done with them do we get to take from the next 2% and so on? eventually you find yourself at the top in the same predicament. however thinking people find a way to protect themselves from the good intentions and lofty visions of others.
socialism does not work. even lincoln understood that.
hopefully he won't push and overide the constitution so blatently that he finds the public in the mindset lincoln faced. there is much confusion and re-writing of history over the causes of the civil war. change and reformation can be good. sometimes it is what happens when you crash your car.
why mention the constitution? it has been shredded and crapped on by both parties for decades all in the name of the greater good.

Feb 26 06:23 PM