Thursday, December 18th, 2014

Lorenzen letter

Dear PolitiFact,

I just saw your piece fact checking Senator Kerry’s statement on Meet the Press that the Bowles-Simpson plan would raise $2 trillion in revenues and wanted to contact you with a further clarification. I am Executive Director of The Moment of Truth Project, a project co-chaired by Simpson and Bowles dedicated to building upon the work of the commission. I also served on the staff of the commission. I am writing to you in that capacity, and have not talked to Senator Kerry’s staff. Although the number he used is different than what we used in the report, I feel compelled to defend his use of that number.

The Fiscal Commission used what we referred to as the “plausible baseline” for measuring savings in the plan. For taxes, the plausible baseline assumed extension of the Bush tax cuts for individuals with incomes below $250K and the 2009 parameters of the estate tax. That means our baseline effectively assumed expiration of the upper income tax cuts, which would cost approximately $800 billion over ten years. The report proposed $1.2 trillion in additional revenues from tax reform compared to that baseline, not counting Social Security payroll taxes. The $2 trillion number Senator Kerry cited compares the revenue levels proposed in Bowles-Simpson to a “Current policy” baseline which assumes all of the tax cuts enacted in 2001 and 2003 continue. That number essentially combines the $800 billion in revenues baked into our baseline by assuming expiration of the upper income tax cuts in addition to the $1.2 trillion in additional revenues from tax reform, chained CPI and gas tax.

The issue of baselines is the source of much confusion in fiscal policy analysis and undoubtedly the source of many headaches for you in your job. Unfortunately there is no single “right” answer about which baseline to use. However, in the context of the work of the Select Committee and Senator Kerry’s comments comparing the proposals being discussed by the Select committee with other proposal, the baseline he used was the most appropriate. All of the proposals discussed in the Select committee used a current policy baseline in calculating the revenue increases -- the Toomey proposal would have raise $300 billion in revenues compared to current policy baseline extending the Bush tax cuts, the Baucus proposal would have raised $1.3 trillion compared to current policy, etc. Applying that same standard to the Bowles-Simpson proposal it would have raised $2 trillion in revenues (not counting SS) relative to current policy. Using the $1 trillion revenue number from Bowles-Simpson in a discussion about the Select committee would have left the impression, for example, that the Baucus proposal would raise taxes $300 billion more than Bowles-Simpson when in fact total revenues would have been $700 billion higher under Bowles-Simpson than the Baucus proposal.

As I said above, neither baseline is “right,” but rather a judgment call about what is the most reasonable comparison. When the Fiscal Commission plan was developed, Congress had recently enacted the Statutory PAYGO Act which effectively allowed for an extension of the tax cuts below $250K but required extensions of the tax cuts for those above $250K to be offset. When the Congressional Budget Office published their long term fiscal outlook that summer, it assumed extension of the tax cuts protected in Statutory PAYGO in its alternative fiscal scenario (the base scenario was current law, in which all of the tax cuts expired). We made the judgment that assuming all of the Bush tax cuts expired was not realistic, and that since Congress has recently acted on budget legislation allowing for an extension of most but not all of the tax cuts that we should adopt the approach in the CBO alternative fiscal scenario assuming the extension of the tax cuts protected in Statutory PAYGO. But shortly after the Commission report was put forward, Congress voted to extend all of the Bush tax cuts, including those for taxpayers above $250K. As a result the Select committee was operating in a very different environment than the Fiscal Commission, with the assumption in our plausible baseline of upper income tax cuts expiring was no longer the likely default position. So virtually all tax proposals discussed this year have been measured against a current policy baseline. For example, the $800 billion in revenues in tentative Boehner-Obama deal this summer was relative to the current policy baseline; if it had been measured against the Fiscal Commission plausible baseline it would have been revenue neutral.

In short, the question of whether the Bowles-Simpson plan raised $1.2 trillion or $2 trillion in revenues comes down to a question of whether you consider the expiration of the upper income tax cuts to be a revenue increase. Bowles-Simpson assumed that would happen on its own as required by statutory PAYGO and did not count them. Subsequent events have shown that to be less certain, and most commentators would consider that to be a tax increase.

Having said all of that, accepting the use of the current policy baseline as the appropriate measuring stick for determining the revenue levels in Bowles-Simpson creates an inconsistency in other parts of Senator Kerry’s comments, namely when he said that Bowles-Simpson had $4 trillion n deficit reduction, with $2 trillion coming from revenues. The $4 trillion in deficit reduction was also relative to the Fiscal Commission plausible baseline which already assumed the revenues (and lower deficits) from expiration of the upper income tax cuts. Measured against a current policy baseline, the plan would have had $5 trillion in deficit reduction -- $800 billion more from counting revenues from upper income tax cuts and $200 billion from lower interest. In other words, using the higher revenue number compared to current policy is reasonable, but that means the total deficit reduction is higher by a corresponding amount.

Sincerely,

Ed Lorenzen

Executive Director, the Moment of Truth Project, Committee for a Responsible Federal Budget