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Tuesday, February 26, 2013

Lopsided is Balanced, and other Orwellian Notions from Senator Tom Udall


Earlier this month Harry Reid outlined a package of tax increases and spending cuts designed to replace the sequester.  As a replacement, it's really a joke - the sequester cuts spending by $85 billion in just this fiscal year, whereas Reid's proposal is estimated to reduce the deficit by $110 billion over several years, with only $3 billion of spending cuts this year, and those limited to defense and agriculture.   But what is even more ridiculous is the argument by various Democratic Senators that it doesn't go far enough in raising revenue.  Barron's quotes Senator Tom Udall (D-NM) expounding this view:
"... some Democratic senators complain that the 50-50 approach to raising taxes and cutting spending is unacceptable. They want more tax hikes and fewer reductions. Shortly after the Reid bill was announced, Democratic Sen. Tom Udall of New Mexico told The Hill newspaper: 'We've let it be really lopsided.' He said he preferred a 'more balanced approach' that would see tax increases in much greater proportion to the cuts in outlays." 
The Times reports Senators Harkin and Sanders shared that view.
In Udall-speak, "50/50" is " really lopsided", and one of the 50's needs to be greater than the other to be "more balanced".   That's positively Orwellian.  In "1984", "War is Peace"; "Freedom is Slavery"; and "Ignorance is Strength".  The Ministry of Peace is concerned with war; the Ministry of Truth is engaged in lies; and the Ministry of Plenty is all about starvation.  Senator Udall is warping language in just the way that Orwell warned government would do to strengthen its hold of power over its citizens.
I was curious.  How does a Senator get himself in a state of mind where lopsided is balanced and balanced is lopsided?  People in public view don't get away for long with saying total nonsense, so there had to be some sort of carefully constructed numbers game that lay behind his absurd remarks, the way perpetrators of a fraud concoct false financial statements to create the illusion of proper accounting.  So I dug around on the web and found a story that explained the Udall world-view in more detail.
The Hill explains " Liberals voiced concern about the 1-to-1 ratio of spending cuts to tax revenue in the package. By their estimation, Congress has already cut $.1 trillion in spending and raised taxes by $700 billion since 2010, they note."

"Since 2010" - that was simple.  Udall et al. are just picking a measurement date that gives them numbers that suit their goals and ignoring the data that don't support their argument.   Specifically, their numbers come from a letter that Senate Budget Committee chair Patty Murray put out a month ago, which contains a more detailed version of this table:


Deficit Reduction during the 112th Congress

($billions, 2013-2022)   
                                               
Source
Spending 
Revenue
Interest Saved   
Total
Spending cuts (excluding sequester)
1,464          

240
1,704
ATRA             (tax increase)

617     
  96
   713
Total
1,464
617
336                 

2,417
                         
This table only captures actions taken after 2010 - when the Republican control of the House made it impossible for the Democrats to pursue their fiscal agenda.   Of course, it begs the question, what would the numbers look like if they included actions taken during the prior, 111th Congress. beginning in January 2009 when  the Democratic Party controlled the legislative process. 

So, working almost entirely from CBO 10-year budget forecasts, I constructed this table, which gives the interpretation most favorable to the Democrats, of what Murray's table would look like if all four years of the Obama administration were included: 


Deficit Increases by the 111th & 112th Congresses
Source

Spending Increases
Revenue Gain
from High Income Taxpayers and Businesses
Revenue Loss from Tax Breaks for Everyone Else
Total
Non-defense spending increases of 111th Congress
 2,600



Spending cuts  of 112th Congress (excluding sequester)
(1,704)          



SUBTOTAL (Spending)



  896
Tax increases on high-income earners and businesses in 111th Congress

(593)


ATRA's tax increase on high-income earners

(713)  

  
ATRA's continuation of estate tax breaks

  348


SUBTOTAL (increased revenue from high-income taxpayers and businesses



  (958)
Tax breaks for all others in 111th Congress


   743

ATRA's continuation of tax policy for all others


3,922

SUBTOTAL (tax breaks for everyone else in both Congresses)



 4,665
Total
896
(958)
4,665
(4,603)

In sum, the full record of Obama-era legislation's impact  on the deficit consists of (1) nearly $900 billion of net spending increases, (b) nearly $1 trillion of net tax increases on high-income earners and businesses and (c) roughly $4.6 trillion of tax breaks for all other tax filers.  There's been no deficit reduction at all.  There's been no spending cuts, net- net.  There's been no balance  --  there's only one type of deficit reduction: tax increases on high-income taxpayers and businesses.

When it comes to deficit reduction, the Senate Democrats have simply "forgotten" what they did in the 111th Congress (of course, when a different topic is on the agenda  - say, looking compassionate - they will "remember" the laws they passed in that Congress, such as the Affordable Care Act).. That is utterly Orwellian.   One aspect of "doublethink" in "1984" is "to forget any fact that has become inconvenient, and then, when it becomes necessary again, to draw it back from oblivion for just as long as it is needed...." 

When I say this is the most favorable interpretation for the Democrats, I have (1) excluded from the above (a) approximately $1 trillion of defense spending increases by the 111th Congress, on the ground that it was substantially all related to the wars in Iraq and Afghanistan and the Democrats are not wholly responsible for those (although they bear some amount of responsibility for both and for the cost); (b) included a $348 billion estate tax benefit for high-income taxpayers, as estimated by CBO, even though Murray's letter  claims there was a $19 billion revenue gain, and (c) included only the first 8 years of the tax increases included in the Affordable Care Act, because that is all CBO included at the time (because CBO prepares 10-year forecasts and the taxes did not start for the first two years after the bill was passed).

I've made my point above; the rest of this post just lays out the detail behind the table I constructed, if anyone wishes to check it.

SPENDING INCREASES BY THE 111TH CONGRESS.
           
Three times a year, CBO presents its 10-year budget forecast, typically in January, in March and then in August.  In each forecast, there is an analysis of changes since the last forecast and a brief description of what caused them -- economic factors, technical factors, or legislation adopted since the prior forecast. I ignore changes CBO attributes to economic or technical factors and just tabulate the changes they attribute to legislation passed by the 111th Congress. 

On January 7. 2009, around the time the 111th Congress commenced its work, CBO forecast total outlays for the 10 years then beginning would be $39.126 trillion.

By March, 2009, the Democratically-controlled Congress and White House had implemented legislation, principally the "stimulus" law or "ARRA", that CBO forecast would increase outlays over their 10-year forecast by $1.3 trillion. 

By August, 2009, the Democratically-controlled Congress and White House had implemented legislation that CBO forecast would increase outlays over their 10-year forecast by an additional $1.35 trillion, approximately 80% of which was defense-related. As noted above, I exclude the defense component from my table.

In the next two forecast updates, there were negligible changes in outlays due to legislation, mainly because the legislature was devoting so much of its energy to hashing out Dodd-Frank and Obamacare.

In August 2010, CBO projected an increase in outlays, due mainly to Obamacare, of $1.1 trillion. 

In January 2011, CBO projected a decrease in outlays due to legislation of approximately $0.05 trillion, (comprised, fwiw, of $0.351 in decreases in discretionary spending offset by $0.148 increases in mandatory spending, and $0.254 increases in debt service).

So the sum of spending increases authorized by the 111th Congress during 2009-2010 is either approximately $2.6 trillion, if you attribute all of the defense spending increase to the policies of the prior administration, or approximately $ 3.7 trillion if you don't.

SPENDING INCREASES BY 111TH CONGRESS    ($billions)    ( includes interest effect)

Source
Amount


Stimulus Bill
 1,300
Defense and Other
 1,350
Obamacare
 1,100
Other changes
 0.050

TOTAL
 3.700




REVENUE CHANGES BY 111th CONGRESS

Now let's look at revenue changes effected by that Congress:

March 2009:   $76 billion in tax reduction due to legislation, the principal components of which were $200 billion of tax relief under the economic stimulus legislation offset mainly by $71 of increased tobacco taxes as part of the SCHIP re-authorization.

CBO's August 2009, January 2010, and  March 2010 forecasts show  no material changes in projected revenue due to legislation.

August 2010: $643 million projected increase in revenue due to Obamacare taxes. This understates the 10-year amount because the law delayed the tax hike until 2013, so the CBO forecast only picks up the first 8 years.

January 2011: $713 billion projected decrease in revenue due to 2-year extension of Bush tax cuts and payroll tax cut extension.

So the net amount of the changes in revenue effected by that Congress was projected to be a decrease of $156 billion. Let's look a little more closely at the distribution of tax increases and benefits from those two big revenue -related changes, Obamacare and the extension of the Bush tax cuts.

Per CBO's August 2010 update, Obamacare provided a "refundable tax credit" to lower-income taxpayers that was estimated to cost $134 billion over the 10- years.  Everything else was a tax on high-income individuals (quantified at $251 billion) or businesses (approximately $525 billion). 

Per CBO's January 2011 report, the payroll tax cut was booked at $112 billion. As for the rest of the $713 billion in tax relief, I could not find a CBO breakdown of how they were distributed.  But the Tax Policy Center, a fairly liberal organization, estimated that 30% of the benefit of the Bush tax cuts went to the top 1% of taxpayers.   So, applying that ratio to the $713 billion cost estimated by CBO, after deducting $112 billion in payroll taxes (which don't benefit the top 1% very much), implies that the 2010 extension generated $180 billion in tax benefits to the top 1%, and therefore, $533 billion in benefits to the rest of the nation.

So, here is a table showing the work of the 111th Congress in relation to taxes:

Time
Increase on High-Income Taxpayers and Businesses
Increase on Rest of Population

March 2009

 ($76 billion)
August 2010
  $777 billion
 (134 billion)
January 2011
   (180 billion)
 (533 billion)

TOTAL
  $597 billion
($743 billion)


So, for all the talk about how the top earners were getting breaks on their taxes, in fact, the 10-year impact of legislation passed during the 111th Congress was a nearly $600 billion increase on taxes on the wealthy and business, while cutting taxes for the rest of the nation by nearly $750 billion.

DISTRIBUTION OF REVENUE IMPACT OF ATRA

Now, let's look more closely at the American Taxpayer Relief Act of 2012 ("ATRA"), passed on January 1, 2013, which is calculated by Senator Murray to produce over $700 billion of revenue.  

Contrary to her estimate,  CBO estimated that the law will generate $4.571 trillion of revenue loss, nearly tripling the projected deficit over the ensuing 10 years.  The reason for the enormous difference is that CBO always prepares its forecasts based on then-current law, which in this case provided (pre-ATRA) for expiration of all the "Bush tax cuts" at the start of the forecast period.  Murray's numbers, in Orwellian fashion, ignore the inconvenient  parts of CBO's forecast, and just treat everything other than tax increases on the rich as a continuation of the pre-ATRA rates with zero impact. This allows her to call it a bill that generated "deficit reduction" when in fact it tripled the projected cumulative deficits.

I could not find a CBO breakdown of the impact of ATRA on high income households, but Senator Patty Murray's January 24, 2013 letter provides this breakdown:

Breakdown of Revenue from High-Income Households in the ATRA of 2012           
($billions) 2013-2022


Increase top rate on ordinary income to 39.6% and top rate
on capital gains/dividends to 20%    

446
Reinstate Personal Exemption Phase-out and Pease itemized
deduction limit for high-income households

152
Estate tax changes     

19
TOTAL
617
                                                                                    

Combining Murray's table with the CBO forecast, I generated the following simplified breakdown of the 10-year fiscal impact of ATRA:

Type
Amount ($billions)
Business tax breaks
    46
Estate tax breaks continued
  348
Income tax increases on the wealthy
 (617)
Continuation of pre-ATRA tax policy for everyone else
3,922
Spending Increases
    272
Interest effect
    600
TOTAL
 4,571