So, You Want to Pay For a $70 Billion Spending Increase With a $200 Billion Tax Cut?

According to CNN, the White House has floated a plan to deal with the fiscal cliff, one which would turn off a few provisions temporarily. Their plan? Turn off the sequester for six months in exchange for letting the upper-income tax cuts expire for a year. Thought of another way, it would repeal the spending cuts set to go into effect by extending the 2001/2003/2010 tax cuts for most people. In a world where elected leaders sought to pay for all new policies (a world us budget folks call PAYGO), that would equate to "paying for" a roughly $70 billion spending increase with a roughly $200 billion tax cut.

The Administration would be able to claim the upper-income tax cut expiration as a pay-for by using a "current policy" baseline in which all the 2001/2003/2010 tax cuts and the Alternative Minimum Tax patch are assumed to be extended and that the sequester would be turned off. We're not saying that using a current policy baseline is necessarily deceptive (we make one, in fact). It is a useful prediction of the budget path we're heading for if we don't make changes. But that's a far cry from the financially responsible path the country should be on.

CRFB believes that lawmakers should enact a comprehensive debt reduction package that puts debt on a downward path as a share of the economy. That package, if large enough, could include a repeal of the sequester at the end of the year and a retention of the tax cuts set to expire at year's end. In fact, any smart plan would avert the fiscal cliff and enact trillions of alternative savings more gradually. But even worse than the fiscal cliff would be adding to our debt indefinitely.

Absent a comprehensive plan, lawmakers should at least be willing to pay for policies that increase the deficit relative to current law. Unfortunately, this proposal from the Administration would fail to live up to that rule. As we said in the beginning, waiving the sequester for six months would cost about $70 billion and extending the majority of the tax cuts would cost somewhere in the range of $200 billion (excluding the AMT patch). The fact that the cost of extending the tax cuts is $200 billion rather than, say, $250 billion does not mean that we've saved any money--it just means we're borrowing less.

Note that even if lawmakers honestly paid for each one-year extension of the tax cuts, sequester, doc fix, and AMT patch, they would just be doing the minimum to get the debt on a clear downward path. Below we have modeled what debt would do if the current policies in the CRFB Realistic Baseline were extended one year at a time and offset with savings in the following ten years (for example, offsetting the cliff in 2020 with savings from 2021 to 2030). In this scenario, we would have higher debt than under current law or comprehensive plan such as Simpson-Bowles. It would put debt on a downward path, but with little room for error.

^{Source: CBO, CRFB, Moment of Truth Project}

In terms of the cliff, the best thing would be to enact a smart and comprehensive fiscal plan that puts debt solidly on a downward path. Absent that, "PAYGO-compliant" extensions are a substitute but clearly not as good. What we should definitely not do, though, is to simply put off the cliff permanently.