What Tax Cuts?

What tax cut?
BY MARC A. THIESSEN
Thursday, July 21, 2011; 11:23 AM
Sen. Kent Conrad is claiming that if the Congressional Budget Office scored the "Gang of Six" deficit reduction plan, "it would find net tax relief of approximately $1.5 trillion." This is deeply misleading. Far from a net tax cut, the Gang of Six plan would result in a massive tax hike of as much as $3 trillion. Democrats understand this -- which is why President Obama was so quick to embrace the plan.

When normal people judge what constitutes a tax increase, they compare what they will pay tomorrow to what they are paying today. If that number goes up, it's a tax increase. That is not how the Gang of Six did its tax calculations. The Gang of Six's assumptions are based on current law, not current policy. Big difference. Current policy assumes Americans will continue to pay what they are paying right now. Current law assumes that, over the next decade, taxes will go up by some $4.5 trillion dollars because of tax cut expirations. The Gang of Six reduces this $4.5 trillion tax increase by $1.5 trillion -- and calls it a tax cut. But the practical result is really a $3 trillion tax increase over what Americans pay today. Consider:

The Gang of Six plan eliminates the alternative minimum tax, or AMT. In scoring this, they assume, based on current law, that tens of millions of middle-class families would have paid the AMT, at a cost of some $660 billion. But in practice, middle-class families never pay the AMT -- because every year Congress passes what is called an AMT "patch" exempting them from the tax. In other words, about $660 billion of the taxes the Gang of Six claims to be cutting over the next 10 years exist only on paper.

The Gang of Six plan also assumes that a number of other tax provisions called "tax extenders" -- such as the research and development tax credit -- will expire at the end of the year. But most of these provisions are routinely extended by Congress. That is another $750 billion over 10 years that that Gang of Six inaccurately counts toward its tax cut total.

The Gang of Six also assumes that all the Bush tax cuts will expire at the end of 2012. But no serious person in Washington believes that all the Bush tax cuts will be allowed to expire. Even President Obama and congressional Democrats support extending some of these tax cuts, and Republicans oppose eliminating any of them. Unless Congress is ready to support the repeal all of the Bush tax cuts -- and thus the imposition of a massive middle-class tax increase -- that is another roughly $3 trillion over 10 years the Gang of Six inaccurately counts.

So if you judge the Gang of Six plan against current law -- which assumes millions of middle-class families would have paid the AMT for the first time next year, the R&D tax credit and other tax "extenders" will disappear, and all of the Bush tax cuts, including those for the middle class, will expire on Jan. 1, 2013 -- then yes, the Gang of Six cuts taxes by $1.5 trillion. But judged against current policy -- what Americans pay today in taxes -- the Gang of Six plan constitutes a massive tax increase.

And what about spending? Aside from freezing congressional pay for an unspecified period of time, repealing the CLASS act (a new long-term health-care benefit created under Obamacare), changes in the Consumer Price Index, and few other small provisions, there are no specific cuts in the Gang of Six plan at all. The plan instructs various congressional committees to produce unspecified cuts: The Armed Services Committee must come up with $80 billion; the HELP Committee must cut $70 billion; the Homeland Security and Government Affairs Committee, $65 billion; Agriculture, $11 billion; Commerce, $11 billion; Energy, $6 billion, and so on - and Congress must eliminate $26 billion in unspecified waste, fraud, and abuse. But the plan offers no specifics.

To see just how absurd Conrad's tax cut claim is, consider this: If the Gang of Six really cut taxes by a net $1.5 trillion, how on earth does its plan reduce the deficit by $3.7 trillion? That would require $5.2 trillion in spending cuts. But the plan outlines nowhere near those kinds of cuts. And even if it did, does anyone believe President Obama would sign into law a plan that cut spending $5.2 trillion while also cutting taxes by $1.5 trillion? Not a chance.

The Gang of Six plan constitutes a massive tax hike disguised as a tax cut. No wonder Obama likes it. The question is: Why would any Republican go along?