The Supercommittee’s Tax Trap, Continued

Yesterday, Mickey Kaus and Keith Hennessey flagged some of the language in the Budget Control Act to ask whether it would nudge the committee toward tax hikes. They were responding to Gene Sperling, and I see that Paul Ryan responded to Sperling, too.

In fact, the legislation explicitly instructs the Committee to use CBO projections and explicitly references current law requirements to estimate how the Committee’s proposal “will affect the levels of such budget authority, budget outlays, revenues, or tax expenditures under existing law” (Section 401(b)(5)(D)(ii) of the Budget Control Act & Section 308(a)(1)(B) of the Congressional Budget Act).

The distinction is very important: Scoring the Committee’s deficit-reduction proposals using alternative baselines, as the White House would prefer, would allow it to propose the kind of large, job-destroying tax hikes that the President tried so hard to get during this round of negotiations. By contrast, scoring the Committee’s deficit-reduction proposals using existing law, which already assumes tax increases, would create significant structural impediments to raising taxes. 

I think I can explain this. Under current law, the pre-Bush tax rates return in 2013. The return of those tax rates has allowed the CBO to assume trillions of new revenue in the years thereafter. (This is why, if you leave most of the tax code triggers and entitlement regime alone, the budget gets closer to balance.)

That creates a problem for tax reformers on the committee. If they propose some tax reform that lowers rates, flattens the code, and raises more revenue than the current code – and most reformers are close to that position – it’s likely that it’ll be scored to raise less revenue than the return of the Clinton tax rates. And if it does, it can’t make it into the plan without more massive spending cuts.