A Fiscal Non-Event, and a Stimulus Non-Event, Too
The discussion surrounding the tax bill — especially its contribution to deficits and debt and its “stimulus” effects — is hopelessly muddled. By and large, the bill is a continuation of current policy, which is to run massive deficits. And doing more of the same is not stimulus.
The confusion stems, in large part, from misleading and slanted congressional budget practices. In the real world, continuing current policy would be just that — continuing. It would not add to or subtract from the deficit or debt. So, extending the current tax rates, extending the current Alternative Minimum Tax (AMT) patch, extending the business tax “extenders,” or extending the current Unemployment Insurance (UI) provisions would have a net deficit impact of exactly zero. On the other hand, a new policy of reduced payroll-tax rates for one year or a new policy on investment expensing (one year at 100 percent and one year at 50 percent) would add to the deficit and future debt. And raising the estate tax from zero to 35 percent would lower the deficit.
That’s a far cry from the discussion surrounding the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJCA?). Why? To measure the impact of a bill, one has to compare it to an alternative. In budget-ese, this alternative is known as the “baseline.” The baseline for congressional budgeting is “current law” (what will happen if Congress goes into a collective coma), a fiction, as opposed to the more realistic “current policy” (what will happen if Congress does what Congress does). Even more confusing is that, since the dawn of congressional budgeting (only 1974, with the passage of the Budget Act), the current-law baseline has stacked the deck in favor of spending. Specifically, if a mandatory spending program is larger than $50 million and its authorization lapses, it is assumed to continue for budget purposes, even though the law has lapsed. So-called current law almost never shows a spending reduction. In contrast, if a tax reduction lapses, it is not continued in the budget. So-called current law nearly always shows a tax increase.
What does this mean in the current context? Specifically, it means that the so-called Bush tax cuts, the AMT, and the business tax extenders are assumed to go away — that is, there is a massive tax increase. Extending them, in the through-the-looking-glass-world of congressional budgeting, would “increase” the deficit. The good news is that keeping taxes low is the best thing for the economy and that there is no real increase in the deficit. The bad news is that the deficit is already enormous.
So, by and large, the tax bill is a fiscal non-event. For the same reason, it is a stimulus non-event. It is simply not “stimulus” to continue current policy. To me, this is a good thing, as the time for Keynesian stimulus is long passed and the focus should be on permanent, pro-growth policy. But even taken on its Keynesian terms, the discussion about stimulus seems badly overblown.
Continuing the current UI regime will not be stimulus, the hyperventilating from the Left notwithstanding. Similarly, trading a Make Work Pay credit for a payroll-tax reduction is a tiny improvement only because MWP has high implicit marginal tax rates and the payroll reduction lowers marginal tax rates.
From this perspective, the recent scene of macroeconomic forecasters marking up their 2011 growth forecasts is perplexing. Either they were fooled by the budget rules, or they really believed that President Obama would permit his Democratic colleagues to destroy the economy prior to his reelection campaign.
This originally appeared on National Review Online on December 13, 2010.