You Say $1 Trillion, I Say 'Huh?'
Budget geeks may have been momentarily confused by President Barack Obama's suggestion at today's news conference that extending the Bush tax cuts for the top 2 percent would cost "close to $1 trillion."
After all, Obama's own Treasury Department estimates allowing those tax cuts to expire would bring in just $441 billion over the next decade.
Was Obama momentarily confused? No. Instead, he's playing a longstanding Washington budget game, in which you can pretty much get any number you like, depending on your underlying assumptions.
For those of you who don't already have this bookmarked on your computer, take a gander at the Treasury's Green Book. In it, you'll see a $1.4 trillion estimate for what the U.S. would collect over the next decade if the "upper-income tax provisions" were allowed to sunset.
However, that figure includes much more than just allowing marginal tax rates on the top two tax brackets to increase (from 33 and 35 percent to 36 and 39.6 percent). It also includes limiting the value of tax expenditures for high-earners ($584 billion), taxing capital gains and dividends at higher rates ($241 billion) and reinstating an old limit on itemized deductions ($122 billion). Even these numbers engage in a bit of budget gimmickry, since they assume marginal tax rates will rise for top earners, which increases the overall revenue estimates.
Taken together, these items add up to more than $1 trillion. However, when Obama and Democrats say they won't allow the Bush tax cuts to continue for the wealthiest, they are not talking about that giant enchilada of tax changes. Instead, they are referring to the marginal tax-rate cuts that Bush instituted for wealthy earners.
Does it matter that Obama is engaging in budget games? Yes, because he presumes that the U.S. can't meet his $1.6 trillion revenue target without raising marginal tax rates on the wealthiest. As I wrote previously, the U.S. could boost its revenue by $1.75 trillion by limiting tax expenditures to $25,000.
Of course, Obama isn't the only one to engage in budget games. Republicans do it too, especially when they assume what economic growth will add to gross domestic product and use that as a defense against raising taxes.
Still, at a moment when the U.S. faces a severe fiscal crisis that will require actual action by Congress, it may be worth putting aside the budgetary sleights-of-hand and focusing on real numbers to solve our financial woes.
Read more breaking commentary from Bloomberg View at the Ticker.