Budget Experts Take the Pelosi Challenge: How Much Could We Save by Leaving Iraq and Letting Bush Tax Cuts Expire?
At the request of House Speaker Nancy Pelosi (D-CA), the non-partisan Congressional Budget Office (CBO) recently examined the impact of three alternative "policy scenarios" on our current budget deficit, expected to hit $1.5 trillion for 2009. Their conclusions were fascinating -- or troubling, depending on your degree of fiscal hawkishness.
Pelosi Scenario One can be defined as the nation's real status quo, assuming that the stimulus bill remains a one-off law that does not change future budgetary estimates. The alternative minimum tax is also assumed to be indexed for inflation every year -- something Congress never fails to do -- and current spending on Medicare doctors' fees as well as the wars in Iraq and Afghanistan are assumed to continue at their current rates. The result is unnerving:
The deficit would be $218 billion higher this year than CBO already predicts and $8.4 trillion higher over the next 10 years.
But of course, current spending on Iraq is bound to change as troop levels subside this year and next. So Pelosi Scenario Two envisions the same circumstances as the first, except that the current force strength in Iraq, Afghanistan, "and elsewhere" dips from 190,000 this year to 75,000 by the end of President Obama's first term.
The result is $1.4 trillion in long-term savings: the same $218 billion deficit increase for this year, but only a $7 trillion increase over the next 10 years.
Okay ... how about those Bush tax cuts for Americans earning more than $250,000, the ones that Obama wants to let expire in 2010? Pelosi Scenario Three envisions the same Iraq/Afghanistan movement as No. 2, plus the expiration of the upper-income Bush tax breaks on schedule.
The result is a whopping $2.8 trillion in long-term savings: the 10-year deficit would be $5.6 trillion above what's already assumed.
All these numbers can be a bit confusing, but here's the rub: a sensible policy of drawdown in Iraq and reverting to Clinton-era tax cuts to the wealthy saves $2.8 trillion over the next 10 years.
Focusing on the reversal of the Bush tax cuts alone, the CBO found a $124 billion price tag to keep them alive for all earners into 2011 but only a $65 billion cost if the tax cuts were reserved only for middle- and lower-income Americans. So when Republicans talk about the "impact of the deficit on future generations," just remind them that $59 billion of that problem can be solved by making life a little harder for high earners.
Josh
Elana
Matt
Eric
I like the muffin top, baby.
Don't go changin' ...
February 25, 2009 1:28 PM | Reply | Permalink
I'm glad to have a report of a somewhat independent nature (not generated by strongly partisan views). But even in the best scenario, long term annual deficits will be running $500B over baseline deficits.
This is not "smart government".
And then there's health care...
February 25, 2009 2:16 PM | Reply | Permalink
(putting accountant hat on)
You are presuming that the CBOs numbers are real. They are ephemeral. They are projecting baseline numbers from the current fiscal environment. I am presuming that the CBO is not inflating tax revenues from a projected economic turnaround.
That is the rub.
With the economic forecast as it stands now, the deficit will increase short of the "McCain Freeze," that we all loved so well. But, to involve any net savings over two practical solutions (Iraq withdrawal and reversal of Bush tax cuts) is better than nothing. If the job numbers increases, and (This is where I hope and pray) if wages increase for the average worker, then the deficit can be brough down strictly based on tax revenues from those sources.
To sum: don't get your underwear in a knot. If you want surpluses, it is going to take a generation... but it starts by practical changes in the budget.
February 25, 2009 3:08 PM | Reply | Permalink
No, I make no such presumption. It isn't that they are "real", I do assume they aren't fake. They are what is on the table to discuss.
If there is a 4th case scenario which is even better, why didn't Pelosi get advice on that?
I don't see how real wages could go up.
No knots here.
February 25, 2009 6:06 PM | Reply | Permalink
note: not making life just a little harder for high earners, making citizenship in the United States of America just a little more EXPENSIVE. There IS no hardship for someone who makes 10 million a year having to pay 3% more than they do now. As usual Nancy stops too soon. She should have asked the CBO to game out what would happen to the deficit if the income tax rate on the top 1% were raised to 45%, and the Cap gains tax raised to 20%. Or how about checking to see what would happen to Soc. Sec. solvency if the ceiling were eliminated entirely and EVERYONE had to pay 6% on every dime they earn.
February 25, 2009 2:20 PM | Reply | Permalink
Actually, there's good evidence that the peak in the Laffer curve is around 60-70%, so you could easily raise the top tax brackets considerably higher than the 45% you propose. I've suggested two new brackets: 50% kicking in at around $400-500k and 70% starting at $1M.
February 25, 2009 3:06 PM | Reply | Permalink
Really, the only way to verify Laffer is empirically.
We just have to keep raising taxes until total receipts start to fall - then we'll know the ideal level!
Maybe we need marginal rates on capital gains too.
February 25, 2009 3:18 PM | Reply | Permalink
But it's been all over the map. The last two decreases in rates both reduced revenues. OTOH, reducing from post WWII rates of >90% to 70% led to an increase in revenues. That's enough empirical evidence to suggest 60-70% as the peak, although I don't think the peak is necessarily static - it will change with economic conditions.
February 25, 2009 3:25 PM | Reply | Permalink
YES. She needs to pursue this as far as possible, I don't make a lot of money (nowhere near millions) and I can say it wouldn't kill me to pay another 1 or 2 percent.
February 25, 2009 7:51 PM | Reply | Permalink
There is no way out except serious permanent reductions in the obscenely bloated defense budget, far beyond what can be achieved just by getting out of Iraq. As Willie Sutton said of banks, that's where the money is. Sooner or later this will HAVE to happen. The question is whether we will wait until it's obvious to almost everyone that the alternative is catastrophe.
February 25, 2009 2:23 PM | Reply | Permalink
And how do you propose transferring defense workers, both soldiers and civilians, from the defense industry to the "real world"? It is one thing to tame the bloated defense budget (which is a black hole that consumes not just our dollars but our very moral core), it is another to beat swords into plowshares. History doesn't point to many examples to follow.
February 25, 2009 3:12 PM | Reply | Permalink
On the contrary, it was done pretty effectively after WWII. It won't happen overnight, but most defense know-how can be applied to civilian use with a little effort.
February 25, 2009 5:58 PM | Reply | Permalink
Well, Eisenhower-era marginal tax rates on the highest income levels would make a large and rapidly increasing dent in both the deficit and the national debt.
That would probably be only slightly more popular than putting Defense spending on a gastric-bypass diet, given the number of jobs that are involved.
February 25, 2009 3:14 PM | Reply | Permalink
Oops, I will now go write "I will use preview" 100 times...
February 25, 2009 2:24 PM | Reply | Permalink
conniptionfit and Steve: I don't think any of those things are off Pelosi's table.
February 25, 2009 2:44 PM | Reply | Permalink
Thank you, c3u! The reaction to a report of the examination of options being requested from the CBO was a little melodramatic. When you pick up a bag of chips in the store and turn it around to read the ingredients list, it tells you how many calories is in a serving. Reading the back of the bag is not the equivalent of eating the chips or even buying them. For all we know, Nancy and Barack may well put the chips back on the shelf and stroll over to the salad bar... The reflexive "Pelosi sucks, Reid has no balls, Conyers is all talk, Leahy should step aside" kneejerking around here is pretty comical at times. The Speaker asked for a review of SOME of her options... Have the Bush years been so damaging to the left that we can't even be rational anymore?
February 25, 2009 4:05 PM | Reply | Permalink
I say tax the top 10% earners until they cry, PERIOD.
February 25, 2009 4:06 PM | Reply | Permalink
They cry at whatever rate they are taxed.
February 25, 2009 7:43 PM | Reply | Permalink