Remember how Congress made its fiscal-cliff deal with votes on New Year’s Day?
Democrats wanted to raise income taxes on high-earners but not cut future Medicare or Social Security benefits. Republicans didn’t want to raise income tax rates, but wanted to cut federal spending and tackle looming entitlement shortfalls.
So on New Year’s Day, Congress voted on a compromise, raising taxes on people with incomes above $400,000, or $450,000 for couples. It also delayed more than $100 billion in scheduled spending cuts for two months.
Logically, you’d think that without cutting spending or raising a whole lot more money through taxes, the nettlesome federal deficit would have only one direction to go: Up. That’s why Sen. Sherrod Brown’s statement on the day of the vote intrigued PolitiFact Ohio. Brown said:
"While this deal isn’t perfect, it represents an important down payment in reducing the deficit and getting America’s fiscal house in order. It also prevents dangerous cuts to Social Security and reduces the deficit by asking millionaires and billionaires to pay their fair share."
How could it cut the deficit?
To understand, we turned to federal budgeting documents and outside group analyses. What we found could serve as a lesson in Washington’s unique logic, though it has its reasons. It’s like a riddle:
Did the fiscal-cliff deal really reduce the deficit?
This answer, maddeningly equivocal though it may be, is the one the nonpartisan Congressional Budget Office gives in its analysis of the deal, officially called the American Taxpayer Relief Act of 2012. The CBO director’s blog said this on Jan. 4:
"Does the Legislation Increase or Decrease Federal Budget Deficits? That depends on what you compare the legislation with."
Explaining this requires on-the-one-hand and on-the-other, so let’s start with the first hand.
Under laws sought and signed by President George W. Bush, Americans across a range of incomes saw their income taxes reduced, starting in 2001 and with more cuts in 2003. President Barack Obama extended the cuts in 2009. Those tax cuts had expiration dates written into law, however, namely, Dec, 31, 2012.
If you believed the expiration date was inflexible, you’d think that everyone’s tax rates were going up on New Year’s Day.
Yet if you paid attention to the talk in Washington, you knew better. You knew that Congress would probably pass bills so that middle-class families could keep their Bush-era tax rates, as Obama wanted, too. You knew that the alternative-minimum tax, using a formula that was about to sock many more families, would be fixed, either temporarily or permanently. Congress on Jan. 1, 2013, chose the latter.
And you knew that neither Democrats nor Republicans wanted big cuts at the Pentagon, even though they previously passed the law that said such cuts would kick in. Sure, lawmakers in 2011 agreed to these eventual cuts when they couldn’t find a better compromise on that year’s budget crisis du jour. But they always vowed to try to find an alternative.
Thus, the one hand -- and the other.
Budgeters deal in numbers and must have a baseline from which to start. The law is a good place, providing a firm benchmark.
So to return to Brown’s claim: If the law had remained in effect and most Americans experienced income tax hikes, the government would be due to collect a lot more tax revenue. And if the scheduled spending cuts, or sequestration, had begun as scheduled, slicing federal outlays by about $110 billion in 2013, the government would be saving a lot more money.
But neither of these things happened because Congress on New Year’s Day changed the law with its American Taxpayer Relief Act. And what happens when you cut the amount of projected government revenue (by keeping many of the lower tax rates) and you spend more, not less? Based on current-law projections, your deficit is bound to rise.
The CBO on Jan. 1 projected, in fact, a rise in the deficit by nearly $4 trillion over the next 10 years, a figure that many in the news media highlighted. The bipartisan Committee for a Responsible Federal Budget, whose members include former Ohio U.S. Sen. George Voinovich, put the deficit rise at $4.6 trillion when adding some of the non-tax items such as the cost of extending unemployment benefits.
So Brown was wrong, right?
Here is where reality kicks in, and the CBO recognizes reality. Besides projecting what would happen based on then-current law, the CBO also ran projections based on "current policy." Then-current policy was always to extend many of the tax cuts beyond their scheduled expiration. The only question was which tax cuts would be preserved.
Democrats pushed for months to raise rates for families earning more than $250,000 a year, for example. For purposes of projections, the CBO assumed under an "alternative fiscal scenario" last August that all the Bush-era tax cuts would be extended.
The fiscal-cliff deal turned out to be less generous than that, at least for families earning more than $450,000. Furthermore, the estate tax rate will rise from 35 to 40 percent (but will keep the $5.25 million exemption) under the New Year’s deal. Taxes on capital gains and dividends for families earning more than $450,000 will rise from 15 percent to 20 percent.
There are additional changes, but you get the idea. All told, this group of tax hikes should bring in enough money -- if you compare it with what was expected to happen politically -- to actually cut deficit projections by $650 billion, says the Committee for a Responsible Federal Budget. The CBO, in the director’s blog, said the deficit will be $700 billion to $800 billion less than projected under a continuation of anticipated policies.
This is not the end of the budget debate, because the sequestration is now scheduled to start on March 1, although it is still deeply unpopular and Congress could change its date or size.
How then, how does Brown’s claim rate for accuracy?
Based on the CBO’s analysis, he was wrong -- if you use the baseline built on the old law and an assumption that every single tax cut would end and the sequester would kick in as scheduled.
But Brown was right if you use the CBO’s alternative analysis. If you were gambling, you’d probably bet somewhere in the middle, which in a way is what Congress did.
On the Truth-O-Meter, Brown’s claim rates Half True.
Statement from Sen. Sherrod Brown, Jan. 1, 2013
Email and telephone conversations with Meghan Dubyak, communications director for Brown, Jan. 11 and 14, 2013
Congressional Budget Office, director’s blog, "The fiscal cliff deal," Jan. 4, 2013
Congressional Budget Office, "An update to the budget and economic outlook, fiscal years 2012 to 2022," Aug. 22, 2012
Committee for a Responsible Federal Budget, "The good, the bad and the ugly in the fiscal cliff package," Jan. 1, 2013
Campaign to Fix the Debt, Statement from Alan Simpson and Erskine Bowles, Jan. 1, 2013
Politico, "Alan Simpson, Erskine Bowles: Missed Moment," by Kevin Robillard, Jan. 2, 2013
PolitiFact Ohio, "Marcia Fudge claims the fiscal cliff deal includes cuts in payments for illnesses that disproportionately affect minorities," by Stephen Koff, Jan. 4, 2013
Tax Law Blog, "Tax law blog: a permanent fix to the AMT problem," by Courtney A. Strutt Todd and Davis Brown, Jan. 2, 2013
Houston Chronicle, "New tax laws improve estate options," by Ronald Lipman, Jan. 11, 2013
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