Why Obama Offers A Net Tax Cut

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There remains some confusion over my Monday story about the fiscal plans of the two presidential candidates. At the top of the story, I quoted John McCain’s top policy adviser Doug Holtz-Eakin saying “I stand corrected” about his prior belief that Barack Obama would raise taxes over 10 years. The McCain campaign pushed back against this quote by telling Marc Ambinder that this comment was little more than a tongue-in-cheek response to the contention that Obama’s tax plan offers a cut. Since then the economist/media-scold Brad DeLong, who calls me a “stenographer,” has uncritically picked up this line, suggesting that I may have misunderstood what Holtz-Eakin was saying.

So I want to make a few things clear. First, the Obama campaign calculates that its tax plan offers a net tax revenue reduction over ten years, if the health plan is included. Second, independent economists at the Tax Policy Center come to the same conclusion. Third, Holtz-Eakin has repeatedly, and quite seriously, invoked the net-tax-cut calculations of Obama to make the argument that the Democrat has a fiscally irresponsible economic plan.

I will explain all this in more detail after the jump.


Nothing is simple about scoring a tax plan, in part because you must first choose a baseline of federal revenue to compare the plan against. There are generally two types of baselines that can be used, “current law” and “current policy.” Under a current law baseline, all of President Bush’s tax cuts are assumed to expire on schedule and the Alternative Minimum Tax is expected to balloon unobstructed. This means that federal revenues will jump significantly, causing both the Obama and McCain tax plans to look like a massive tax cut (in the trillions of dollars) by comparison. (McCain’s cut is substantially bigger than Obama’s.) For obvious reasons, neither campaign likes to use this baseline.

They prefer the current policy baseline, which assumes that Congress continues to “patch” the AMT and decides to continue the Bush tax cuts indefinitely. (Note: it is by no means a certainty that a likely Democratic Congress would extend the Bush tax cuts.) And it is under this scoring system that the Obama campaign, the Tax Policy Center and Doug Holtz-Eakin have all discussed the fact that Obama is offering a tax cut.

The Obama campaign makes this claim based upon its internal calculations, which have not been released to the public. The Tax Policy Center, however, fleshes out the numbers. In its “Updated Analysis of the 2008 Presidential Candidates’ Tax Plans,” the center scores the positive revenue impact of the Obama plan over a decade at $778.3 billion under the current policy rubric (see page 19). But that number does not include Obama’s health plan, which is made up largely of more targeted tax cuts. Later in the report, the center estimates the cost of the Obama health plan at a cost of $1.63 trillion over 10 years (page 51). Some of this money is spending for an increases in Medicaid and the SCHIP program. But Len Burman, an author of the report, estimates that “on the order of one trillion dollars, and probably a little more” is a tax cut. So if you subtract about $1 trillion from $778.3 billion, you get a result that shows Obama would lower tax revenue over a decade, if all his plans were enacted.

The Obama campaign refuses to confirm the specific numbers in the Tax Policy Center report. But Jason Furman, who is a top economic policy adviser for Obama, told me that it gets the gist right. “That is an incomplete estimate of the health plan, but it is in the ball park for the portion of the health plan that involves tax cuts,” Furman told me.

Holtz-Eakin says he was first informed about the Obama campaign’s estimates of a revenue loss by Furman during a joint appearance on CNBC. Since then he has repeatedly used this fact–without challenging it–as a talking point to make the case that Obama’s plan is irresponsible, since it also includes a number of large spending increases that would have the effect of growing the deficit. He did this in an interview with me last week, from which the “I stand corrected” quote was pulled. He also did this in a public forum hosted by the Tax Policy Center on July 23, during a debate with Austan Goolsbee, another economic adviser to the Obama campaign. Here is my transcript of the exchange:

HOLTZ-EAKIN: I need to establish the fact of whether there is a tax cut here or not. Jason Furman told me on CNBC that you have a net tax cut.

GOOLSBEE: Counting the healthcare tax credit.

HOLTZ-EAKIN: Well you don’t have a net spending cut, so the deficit has to be exploding.

GOOLSBEE: Yes we do.

HOLTZ-EAKIN: There is no way. I mean. . . So we’ll get back to that. So if you combine what I believe to be an explosion in the deficit, tax cuts, lots of spending, the back-step on trade policy, the added marginal incentives on tax policy, you are going to have an economy that performs worse than doing nothing. At a time when we need to improve, the Barack Obama recipe is to have lower household incomes five years out, lower jobs five years out and lower GDP growth. That’s not something that we need. That’s not a foundation for success.

Now it is true that neither Hotlz-Eakin nor the McCain campaign has been able to independently confirm whether or not the Obama plan would produce a net tax cut over 10 years. But they have no information to dispute that claim either. To say that any reference to Obama’s planned tax cut is “tongue-in-cheek” misses the point of what should be a key part of the economic debate over these two campaigns. Both Democratic and Republican candidates are promising new spending measures, and a net tax cut, a recipe to grow the national debt. Now, both campaigns say that they will deal with this problem with spending cuts elsewhere, but they have yet to produce any clear numbers to back this up. What’s more, independent analysts are highly doubtful that Congress would allow major spending cuts.

The McCain campaign is concerned about the Holtz-Eakin quote and the Tax Policy Center score because of the political point it makes. McCain regularly says that Obama will raise your taxes, and that claim is complicated by these facts. But your children and grandchildren may not care much about the political point. The nation faces a major fiscal crisis which neither candidate has addressed in a serious way. Obama says he will continue deficit spending. McCain says he will balance the budget, but to do that he must accomplish major cuts in spending that are widely seen as almost impossible to enact. We might be wise as a nation to consider the cautions offered by the Concord Coalition, a reputable nonpartisan group that focuses on the national debt:

One thing is clear: the status quo is not acceptable. The next President will inherit a fiscally lethal combination of changing demographics, rising heath care costs, and falling national savings. The public should take care not to buy the proposals of Presidential candidates that either ignore the magnitude of the long-term fiscal challenge or lock candidates into positions that make the problems insoluble. Improving the nation’s long-term fiscal outlook will require hard choices on spending and tax policy.

As it stands, neither candidate has taken up this challenge. Both are staying vague so they can tell voters what they want to hear. That’s what politicians do.