June 2 (Bloomberg) -- Pop quiz: Does President Barack Obama want to raise taxes or lower them? This one should be easy. Republicans say Obama’s budget plan raises taxes. The White House agrees. Case closed, right?
Wrong. Or, at least, incomplete. Obama’s budget plan clearly calls for a tax increase. But a tax increase as compared to what?
Well, that’s where things get tricky. You have to pay attention to the counterfactual, which, in Washington, we call “the baseline,” and which politicians tend to manipulate without anyone noticing.
In order to gauge a policy proposal’s effect on future federal budgets, you need to compare it to budget projections without that proposal. That’s your budget baseline. The question -- and it turns out to be a very consequential one -- is how you determine that baseline, because that requires making some tough judgment calls. Are the Bush tax cuts going to expire? Will Congress cut payments to Medicare? How fast will the economy grow?
The simplest way to deal with these variables is to use what the Congressional Budget Office calls the “current-law baseline.” It’s a straight-line projection based on the laws already on the books -- a world where Congress passes no new legislation whatsoever. Under the current-law baseline, all the Bush tax cuts expire in 2012. The 1997 Balanced Budget Act automatically cuts Medicare payments to doctors by more than 20 percent. The Affordable Care Act survives Republican repeal efforts and health care reform is fully implemented in 2014.
Congress Goes Home
The nation’s fiscal outlook is very different under this baseline. “It is a fact that if Congress simply goes home,” writes economist and former Treasury Department official Brad DeLong, “that we do not have a long run deficit problem.”
That baseline is implausible. Neither party supports full repeal of the Bush tax cuts. Neither party will allow the deep cuts in payments to physicians that the current-law baseline assumes. In addition, Republicans are hoping to kill, or at least hobble, the Affordable Care Act, scuttling its cost controls in the process.
The Congressional Budget Office is aware of all these factors; this isn’t their first time at the rodeo. So it has developed something called the “alternative-policy baseline.” Under this scenario, most of the Bush tax cuts are made permanent. Congress continues protecting Medicare physicians from deep pay cuts. The Affordable Care Act’s cost controls are blocked. And the deficit gets real bad, real fast.
The CBO does not, unfortunately, have a monopoly on baselines. The Obama administration, for instance, has drawn up a baseline that basically falls between the CBO’s current-law and alternative options. The White House baseline assumes that most, though not all, of the Bush tax cuts are made permanent and that Congress doesn’t cut payments to doctors, yet saves the same amount of money by cutting spending or raising taxes elsewhere. It also assumes that the Affordable Care Act is fully implemented.
Which brings us back to taxes. Over the next 12 years, the Obama administration says, it wants to raise taxes by a bit less than $1 trillion. It sounds like a bold advance for fiscal responsibility -- except that it’s pegged to a baseline that already includes the extension of $3 trillion in tax cuts. According to the current-law baseline, the White House isn’t raising taxes, it’s cutting them significantly. This is perhaps the first time in recorded history that a politician is misleading the public into thinking that a tax cut is really a tax hike.
The White House is hardly unique in gaming the system. Sometimes, politicians simply make up a baseline to serve a specific political goal. During the congressional debate over health reform, the Republicans on the House Budget Committee created their own baseline that added previously existing expenditures like the Indian Health Service to the cost of the Affordable Care Act. Why? They wanted to make the Affordable Care Act look more expensive.
Playing baseline games is a way for politicians to hide irresponsible decisions. And it generally works, because the details of baselines and budgets are too weedy for the media to explain easily to the public. Here’s the bottom line on baselines, and there’s nothing about it that the public can’t understand: First, Congress should do no harm.
If Congress does nothing, the federal budget basically balances itself in coming years. It doesn’t achieve balance in a way that anyone will like -- taxes eventually reach almost 30 percent of GDP and Medicare cuts payments to doctors so drastically that many of them will abandon the program. But it balances.
Congress can solve the deficit problem simply by sticking to that baseline. That doesn’t mean it must stick to those specific policies. The cost of tax cuts can be offset by spending cuts. The pain of spending cuts can be eased through intelligent policy reforms. But Congress shouldn’t be allowed to pretend that the budget deficit is some irrepressible force of nature. When we say we’re facing deficits as far as the eye can see, what we mean is that this Congress, and the ones that follow, are expected to pass laws creating such deficits.
So the most credible deficit-reduction plan that President Obama could offer is also the simplest. He should announce that he will veto any legislation that increases the deficit over the current-law baseline. To override his vetoes would require a two-thirds vote of both houses of Congress -- a near-impossibility in a closely divided legislature. As a result, Congress would be forced either to stick to the current-law baseline or pass deficit-neutral legislation. Obama hasn’t done that. He’s playing baseline games just like the rest of them.
(Ezra Klein is a Bloomberg View columnist. The opinions expressed are his own.)
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