OMB Says: Yes, We’re Raising Your Taxes by Over $1.7 Trillion

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In recent months, Americans across the country have expressed increasing concern about the new tax burden that will be necessary to finance exploding federal spending. In each of the years 2009-2011, this spending will be approximately equal to one-quarter of the entire economy, its highest level since the world war era. At a time when recession and baby boomer retirements were already swelling expenditures, the federal government has chosen to enact a trillion dollars in additional health care spending over the next decade. American taxpayers are unsurprisingly wondering just how much they will each have to pay for all of this.

The reaction from Washington D.C. has been one of perplexity. “The rise of the Tea Party at a time when taxes are literally at their lowest in decades is really hard to understand,” stated one befuddled tax policy expert. Senate Majority Leader Harry Reid opined that the millions of misinformed Americans needed to be “reminded” that “98 percent of Americans got a tax cut last year.” And a CBS article dutifully recited all the myriad forms of tax relief delivered by the Obama Administration, opining that groundless public angst must leave government leaders “banging their heads against their desks.”

Perhaps we can help to explain this seemingly irrational public concern. Indeed, taxes are temporarily low as a percent of GDP – as they always are when the economy struggles, causing wage income, investment income and profits to decline. But at the same time, federal spending is at a historic high, and federal policy makers persist in adding new spending to it. Is the public deranged to conclude that this spending must produce either higher taxes or higher debt – or are many Americans perhaps gaining insight into a reality that their government is attempting to paper over?

One enormous source of confusion on this point is the Obama Administration itself, which has employed shifting frames of reference to argue simultaneously that its policies are cutting taxes, yet still reducing the deficit. The Administration’s budget presentations have persistently contradicted those of the non-partisan Congressional Budget Office (CBO). CBO has found that deficits from 2011-2020 would total $6 trillion under current law and that the President’s policies would additionally inflate them to a whopping $9.8 trillion.

The Administration’s Office of Management and Budget (OMB) has chosen to put a different gloss on the same picture. OMB shifts the math for various Administration policies by placing them in the “current policy” baseline rather than counting them as “new” policies. Under their unconventional calculation, they are able to claim that current law would otherwise result in $10.6 trillion in deficits from 2011-2020. Using this alternative standard for comparison, OMB claims that the President’s policies would reduce deficits to $8.5 trillion over the same period, as compared to current law.

But – there are big problems with the Administration’s arguments because there are some inconsistencies. The Administration’s claims of deficit reduction only hold water if we accept that the Administration is cutting spending and raising taxes. If instead we accept their claims used elsewhere that taxes are being reduced, then CBO is right – the Administration’s policies are swelling the deficits. Try as it might, the Administration can’t have it both ways.

Let’s review the Administration’s budget to see what it is specifically claiming about the effects of its tax policies.

Table S-2 in the Administration’s budget asserts that the President’s policies would reduce deficits by $2.1 trillion over the next ten years. $678 billion of this is listed as arising from “upper-income tax provisions dedicated to deficit reduction.” These are tax increases on individuals and business owners the Administration defines as “wealthy,” but they are tax increases nevertheless.

Also on the same table, we see a further $749 billion euphemistically described as “other revenue changes and loophole closures,” which is Washington-speak for “more taxes.” Taken together, that’s more than $1.42 trillion in new taxes so far.

At the same time, the Administration’s presentation lists $284 billion in “tax cuts for families and businesses” (notably, these “tax cuts” are described far more bluntly than the tax increases). But be careful – a footnote indicates that this includes “refundable tax credits,” which are not really tax reductions at all, but federal spending outlays to non-taxpayers. Giving the Administration somewhat generous credit for the amount of tax relief here, plus the tax relief portions of “temporary recovery measures,” we are still at more than $1.15 trillion in net new taxes so far.

But wait: there’s more. The Administration’s budget also contains a placeholder for $150 billion in deficit reduction from health care reform. But that’s a net number. It’s the net of a much larger increase in new spending, partially offset by other spending constraints and the rest by still further tax hikes. According to CBO, drawing upon analyses by the Joint Committee on Taxation, the health care legislation contained $146 billion in new penalty payments from individuals and employers as well as taxes on “Cadillac plans”, plus a further $406 billion in additional revenue payments. This results in a conservative estimate of $550 billion in new taxes from this bill alone over ten years.

Adding this to our running total of net new taxes, the Administration is claiming credit for raising revenues over the next ten years by at least $1.7 trillion. Indeed, this accounts for the vast majority of the $2.1 trillion in deficit reduction that the Administration claims relative to their already unconventional calculation of “current policies.” When we consider that the Administration also counts $279 billion in debt service savings towards that $2.1 trillion total, virtually the entirety of the Administration’s plans for deficit reduction come from raising Americans’ taxes.

The inconsistent message doesn’t stop there. The Administration has also convened a “fiscal commission” charged with making recommendations to improve the unsustainable budget outlook. The Executive Order establishing the commission charges it with addressing the gap between the federal government’s “revenues and expenditures.” The Administration has made clear that still further tax increases are fully on the table as far as this commission is concerned.

In the end, it’s fairly simple. Americans are concerned about rising tax burdens not because they are less informed than they should be, but more informed than Washington is giving them credit for. Americans know that unprecedented levels of federal spending cannot be sustained without the bill eventually being passed to taxpayers.

But there’s another reason for Americans’ growing concern. Americans believe their taxes are going up in part because the Administration, in less-guarded moments, is telling them that their taxes are going up. Americans can see all of the new spending being done in Washington – granted, some of it before the new Administration came into office. There was TARP, there was a series of deficit-increasing stimulus bills, and now a vast expansion of health care spending. And yet the Administration claims that its policies are bringing deficits down. Americans are smart enough to know how that math works.

Reasonable people can differ on the optimal levels of federal spending and taxation. Reasonable people can differ in their view of the budget picture under current law. But reasonable people can’t have it all ways at once; it’s not realistic to expect Americans to simultaneously believe that their taxes are being cut, and deficits are being slashed, while the federal government spends a further trillion on health care and nearly a further trillion on stimulus spending.