Setting the Record Straight on Spending Cuts and Taxes in the Fiscal Commission Plan

In a Heritage Foundation analysis of the President's Fiscal Commission's final plan, Brian Riedl argues that the recommendations have "too much taxes, not enough spending cuts." Riedl takes issue with the Fiscal Commission's claim that the primary (before interest) savings are split between 65 percent spending cuts and 35 percent tax increases. Instead, he argues that its more like a 50/50 split, making taxes look like a bigger slice of the deficit reduction pie. As it turns out, Riedl's analysis is based on different policy projections than the ones used by the Fiscal Commission.

Riedl compares the spending and revenue paths stemming from the Commission's recommendations (found in the appendix of their report) to an illustrative path of "current-policy" for the upcoming decade. He assumes:

• Congress fully extends the 2001/2003 tax cuts
• Annual passage of the "doc fix" to prevent steep cuts in Medicare payments to physicians
• Spending on the wars in Iraq and Afghanistan follow CBO's "fast drawdown" scenario
• Other discretionary spending grows at the rate of the economy

According to Riedl, comparing the Commission's recommended spending and revenue levels to the above baseline leads to about $3.5 trillion in primary spending savings and about $3.3 trillion in increased revenue - thus leading to the 50/50 split between spending and revenues.

However, Riedl's approach makes several assumptions that make the Commission's plan appear to save less from spending cuts but more from tax increases. Using what we believe to be more realistic projections for the coming decade gets the split between spending cuts and taxes back toward the 65/35 ratio in the Fiscal Commission plan. (See CRFB's Realistic Baseline for more info.)

Let's begin with revenues. Revenues in his current-policy baseline are abnormally low since he assumes that all the 2001/2003 tax cuts are extended (instead of only those for people earning under $250,000, also known as the "middle class" tax cuts) and makes no mention of the estate tax. The 2010 PAYGO law states that only middle and lower income tax cuts are exempt from having to be offset. Thus, assuming that all the tax cuts are extended would require an additional $700 billion (according to Treasury estimates) in revenue, spending cuts, or some combination of the two in the current-policy baseline. Secondly, by letting the estate tax expire for the remainder of the decade, revenues are even further depressed in Riedl's baseline. Assuming a continuation of the estate tax at its 2009 levels--as in the President's budget request--would add roughly $300 billion in revenue to the current-policy baseline. With higher revenues under the current-policy baseline, revenues in the Commission's plan don't appear as high. In fact, revenue increases could be about $1 trillion less under a baseline that made these additional assumptions.

As for spending, Riedl's current-policy baseline assumes the "fast drawdown" scenario for troops stationed in Iraq and Afghanistan. A close inspection of the numbers shows that his baseline assumes troop levels decline from about 150,000 today to 30,000 by 2013 - a very rapid drawdown. However, the President's FY 2011 budget request (one of our closest approximations for "current policy" in the this arena) and the Fiscal Commission assume a more gradual drawdown of troops in these countries, more in line with 60,000 troops in Iraq and Afghanistan by 2015 than 30,000 by 2013. More importantly, the Fiscal Commission sets its discretionary spending recommendations off of the President’s baseline, so if the outlook for war spending drastically changed, the recommendations would too. Thus, assuming a more gradual reduction in war costs would push spending projections higher by roughly $315 billion than as represented in Riedl's baseline.

It is important to note that none of this is to say that Riedl's baseline is "wrong", but merely that whatever split between spending savings and revenue savings in a fiscal plan depends on the baseline to which the savings are being compared. Wonky...we know. Surely, future spending and revenue levels could follow the path identified by Riedl. However, we should all aim to judge fiscal plans against the most realistic projections for future spending and revenues.

So, subtracting about $1 trillion* from the $3.3 trillion in revenue savings and adding about $300 billion to the $3.5 trillion in spending cuts gets you back to roughly a 65/35 split between spending cuts and revenue increases, respectively, as stated in the final plan. But these numbers don’t even talk about the significant reductions in interest payments on existing debt (about $673 billion in the Commission plan) that result from actually have lower deficits and debt. And these interest payments are the least productive spending of all.

What's the bottom line? It depends on the assumptions you use to compare fiscal plans.

*Note: It could be less than $1 trillion, if some combination of spending cuts and tax increases were used to pay for the upper-income tax cuts not exempted under PAYGO, but additional spending cuts would have to be identified. This would largely keep the spending cut/tax increase revenue split unchanged.