I think now is the time to consider the fiscal implications of the candidates’ budget — and particularly tax — plans, especially considering the revenue declines and outlays that will confront the next President. Indeed, I would say imminent revenue declines will place an even greater premium on sensible tax plans, and efficient use of Federal dollars. Figure 1 displays the budget surplus to GDP ratio, both actual and CBO baseline.
Figure 1: Federal budget balance to GDP ratio (thick dark green), baseline (green), EGTRRA/JGTRRA extended (purple), baseline with Obama tax plan as stated by campaign staff (blue), baseline with McCain plan as stated by campaign staff (red), and Deutsche Bank estimate for FY 2009 (teal square). All dates pertain to fiscal years. Sources: CBO, The Budget and Economic Outlook: An Update (September 2008) Table C-2, Table 1-8 [xls], 2008 deficit data from October Monthly Budget Review, Williams and Gleckman, “A Updated Analysis of the 2008 Presidential Candidates’ Tax Plans,” (Tax Policy Center, Sept. 15, 2008), Chowdhury and Huie, “Skyrocketing Issuance,” US Economics/Strategy Weekly (Deutsche Bank, 10 Oct.) and author’s calculations.Figure 1 also reports the alternative ratio if the 2001 and 2003 tax cuts (EGTRRA and JGTRRA) are extended (but not including AMT fixes). What is noteworthy is that if Obama’s plan (as evaluated on September 15 by the Tax Policy Center) is implemented, then — excepting the first couple years, the budget balance mimics the baseline plus extending EGTRRA/JGTRRA. On the other hand, the McCain’s plan implies a substantial deterioration relative to even the baseline plus tax cut extension. The McCain plan induces budget deficit to GDP ratio nearly 1 percentage point larger than the Obama plan by FY2018. (Note: I have used the revenue implications as indicated under “Tax Proposals as Described by Campaign Staff” in the following table):
Table from Williams and Gleckman, “A Updated Analysis of the 2008 Presidential Candidates’ Tax Plans,” (Tax Policy Center, Sept. 15, 2008).Let me stress what I think is the key take-away from this table: the total revenue loss FY2009-18 under the McCain plan is $4170.5 billion, as compared to the $2947.6 billion loss relative to CBO current law baseline. So the McCain plan implies a $1.2 trillion extra revenue loss. Alternatively, the McCain plan implies a 41.5% greater tax revenue loss than the Obama plan.
Figure 1 also depicts the DeutscheBank estimate for FY2009 budget deficit. From the report (not online):
For the on-budget contribution to issuance, we are expecting a $775 bn deficit in FY 2009. This is based on the CBO baseline, adjusted for increasing baseline expenses, falling revenue (particularly from corporate income taxes), potentially large fiscal initiatives, and a fiscal stimulus package from the new Administration that would all add up to a near doubling of the traditional measure of the budget deficit. For our estimate, we are assuming $100 bn outlays for FDIC rescues and as a fiscal stimulus, as well as $35 bn above the baseline for purchases of GSE preferred stock. The actual outcome relative to our budget deficit estimate is biased upward, since there could easily be a larger fiscal package, the FDIC outlays could move sharply higher if more banks fail, and tax revenues could fall if the economy enters into a deep recession.
This excerpt highlights the fact that the world, and the macroeconomic and budget outlook, have changed drastically since September 15th, when these revenue implications were tabulated.
Since then, the candidates have released new spending initiatives. The fiscal implications are examined in this Tax Policy Center report, entitled The Presidential Candidates’ New Tax Proposals (October 28):
In response to the deterioration of the economy and the decline in asset values, Senators McCain and Obama have offered new proposals related to unemployment compensation, retirement savings, taxation of capital gains, and job creation. Although the proposals would provide some benefit, they have significant shortcomings.
In response to the deterioration of the economy and the decline in asset values, both presidential candidates offered new proposals related to unemployment compensation, retirement savings, taxation of capital gains, and job creation. Although the proposals would provide some benefit, they have significant shortcomings.
Senator McCain proposes to exempt unemployment compensation from federal income tax in 2008 and 2009 for most taxpayers, suspend required distribution rules for IRAs, lower the tax on some withdrawals from retirement savings accounts, increase the limits on the deductibility of capital losses, and lower the tax rate on long-term capital gains. Senator Obama would eliminate all taxation of unemployment compensation, allow limited penalty-free withdrawals from retirement savings account, and provide firms a refundable credit of $3,000 for each additional employee they hire. All of those proposals would be temporary and expire by 2010 or 2011.
Most of the proposals are very poorly targeted and would do very little to address the fundamental problems caused by the economic downturn. The proposal to eliminate tax on some or all unemployment benefits, for example, which is supported in different forms by both candidates, would most help unemployed workers who have substantial other income. A better option would be to extend unemployment benefits for workers who suffer long spells of unemployment. Most of the other proposals would do little good and could have unintended and counterproductive side effects.
It strikes me that these tax-based initiatives are ill-suited to countering the impact of recession, and the tabulation buttresses my view that stimulus should be oriented toward transfers and spending on goods and services, as discussed in this post on multipliers.
Table from Committee for a Responsible Federal Budget, Guide to Stimulus Proposals: The 2008 Presidential Election (released October 31). Note that, while the price tag of McCain’s plan is $52.5 vs. $186.5 to $190 billion for Obama’s, this calculation requires that the $300 billion McCain plan to buy distressed mortgages is funded out of the $700 billion TARP funds.
While these are big numbers, I think they are still dwarfed by the tax policy impacts, illustrated in Figure 1.
A last point. Figure 1 depicted the deficit impacts taking the campaign staff numbers as given. However, the Tax Policy Center (a joint Urban Institute/Brookings Institution) has conducted its own analysis based upon the candidates’ stump speeches (second panel in the table). This yields the implied deficits illustrated in Figure 2.
Figure 2: Federal budget balance to GDP ratio (thick dark green), baseline (green), EGTRRA/JGTRRA extended (purple), baseline with Obama tax plan as indicated in stump speeches(blue), baseline with McCain plan as indicated in stump speeches(red), and Deutsche Bank estimate for FY 2009 (teal square). All dates pertain to fiscal years. Source: CBO, The Budget and Economic Outlook: An Update (September 2008) Table C-2, Table 1-8 [xls], 2008 deficit data from October Monthly Budget Review, Williams and Gleckman, “A Updated Analysis of the 2008 Presidential Candidates’ Tax Plans,” (Tax Policy Center, Sept. 15, 2008), Chowdhury and Huie, “Skyrocketing Issuance,” US Economics/Strategy Weekly (Deutsche Bank, 10 Oct.) and author’s calculations. This graph highlights the fact that the McCain plan implies a substantially more serious deterioration in the fiscal balance than the Obama plan: -$6,953.5 billion versus -$2,557.4 billion, over FY2009-18, a $4396.1 billion difference. In other words, the McCain plan implies a 171.9% larger reduction in revenue relative to current law baseline than the Obama plan, as scored by the Tax Policy Center. (Of course, the McCain plan does include substantial unspecified spending reductions, but these are akin to the “magic asterisks” of yore.)
Originally published at Econbrowser and reproduced here with the author’s permission.