The Benefits of Fiscal Illusion

David Wessel does a good job explaining how the Gang of Six plan is both a tax cut and a tax increase:

The Gang of Six, a bipartisan group of senators, threw its deficit-reduction package into the arena Tuesday and it is variously described as increasing tax revenues by $1 trillion over 10 years and also decreasing them by $1.5 trillion over 10 years. Huh?

Measured against current law, the Gang of Six plan is a tax cut. The law currently says that the Bush tax cuts expire at the end of 2012 for everyone and that the pesky Alternative Minimum Tax will reach deeper into the middle class (because it doesn’t automatically adjust its thresholds for inflation).

The Gang of Six, among other things, would eliminate the Alternative Minimum Tax—that alone would cost the Treasury about $1.7 trillion versus current law. Altogether, the various tax changes in the Gang of Six plan would reduce tax revenues by $1.5 trillion.

But no one expects current law to prevail. Congress every year, for instance, puts a patch on the Alternative Minimum Tax so it won’t hit more families. And both the White House and many Republicans want to extend the Bush tax cuts for taxpayers with incomes under $250,000 a year. (The argument is over expending them for taxpayers with higher incomes.)

So budget wonks have developed “alternative” or “realistic” baselines. The Bowles-Simpson fiscal commission used such a baseline, borrowing one developed by the Obama White House. Among other things, that yardstick assumes the AMT is patched year after year, and assumes the tax cuts for the under $250,000 crowd are extended. Against that baseline, the Gang of Six raises about $1 trillion revenue over 10 years, roughly the same sum that the Bowles-Simpson plan did. That’s how it’s also a tax increase.

Thus, if the Republican base reads it as a tax cut and the Democrat base reads it as a tax increase, we just might get a deal.

Ella and Louis offer relevant advice.


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