Battle of the Think Tanks over Taxes and Deficit Spending

Last week, Republican Members of Congress, including Colorado’s very own Rep. Doug Lamborn (R-Colorado Springs), started circulating a claim that the Democratic majority in the House had passed a budget plan that would lead to the largest tax increase in history (to the tune of about $3,000 per taxpayer).  Congressional Republicans draw this conclusion from a report put out by The Heritage Foundation, a conservative think tank based in Washington, DC.

Yesterday, the Center on Budget and Policy Priorities issued a response of sorts: a statement by CBPP’s Executive Director Robert Greenstein entitled “Claim that Congressional budget calls for ‘largest tax increase in history’ is inaccurate.”  Greenstein notes that “rather than calling for a tax increase, the budget plan lays the groundwork for substantial tax cuts within the next five years.”According to The Heritage Foundation, “the typical American taxpayer could be paying $3,026 more in federal income taxes five years from now, under the budget resolution adopted recently by the U.S. House of Representatives”.  Study author Shanea Watkins comes up with the tax increase figure based on this view:

The House leadership has proposed to increase spending over the next five years.  Given the leadership’s avowed commitment to paying for spending increases, tax revenues will have to rise.  Which taxes will have to rise is unclear, as budget resolutions are notoriously short on details.  However, the failure of House leaders to include any language addressing the expiring Bush tax cuts of 2001 through 2004 indicates that they could intend to end these tax cuts.  This, in turn, means that the House leadership could be allowing American taxpayers to assume a large and expensive tax increase upon the expiration of these tax cuts.

CBPP Analysts James Horney and Richard Kogan present a different interpretation of the Democratic budget plan:

The congressional budget resolution assumes that if all entitlement and tax legislation conforms to the PAYGO rules, there will be a surplus of $156 billion in 2012.  However, the budget resolution also assumes that Congress will enact tax cuts with net costs of $109 billion in 2012 alone and $180 billion through 2012.

From the CBPP perspective the Democratic budget actually leads to a net tax cut, as the end of the Bush tax cuts is already the law on the books. Making any of those cuts permanent, then, is the equivalent of a new tax cut.

The folks at Heritage define a “tax cut” differently.  They contend that because Democrats do not plan to extend all of the Bush tax cuts, Democrats are voting to raise taxes by not acting to change the law.  That is, if Democrats do not change tax law by one word, they will have raised taxes by allowing the Republican passed law to continue on the books as is.

Watkins sees this as a major mistake by the Democrats, and predicts that such a tax increase would lead to a significant reduction in economic growth.  Watkins does not assume, however, that the perpetual deficit spending proposed by the President and Congressional Republicans will have a negative impact on the economy, jobs, or the incomes of regular working people.

Underlying the Democratic plan is the belief that deficit spending is just as taxing on the economy, as are income taxes, if not more so, as deficits are financed by taking money out of the financial markets, which are the same markets that businesses look to for money to buy new equipment, finance construction of new facilities, and take on and train workers.  the tax rates that Democrats propose allowing to increase are for the wealthiest Americans earning over $200,000 a year.

Does Heritage have it right?  Do deficits not count as a tax, but allowing a Republican passed law to take effect counts as a Democratic tax increase?

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Mark Mehringer

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