The Heritage Foundation has released a misleading document entitled "Ten Myths About the Bush Tax Cuts." The first "myth" that Heritage's Brian M. Riedl "debunks":

Myth #1: Tax revenues remain low.
Fact: Tax revenues are above the historical average, even after the tax cuts.

Tax revenues in 2006 were 18.4 percent of gross domestic product (GDP), which is actually above the 20-year, 40-year, and 60-year historical aver­ages.

But a careful inspection of the budget using CBO's "The Cyclically Adjusted and Standardized Budget Measures" indicates that when the effects of the economy on federal revenue and expenditures are accounted, the budget deficit is mostly the result of the 2001 and 2003 tax cuts. From 2001 to 2005, federal tax receipts, as a percent of the economy, were 0.6% lower than average, and federal outlays were 0.8% lower than average.

Revenues and Outlays as Percent of GDP
	Revenues	Outlays
20-year Average	17.7	19.5
40-year Average	17.7	19.3
2001-2005	17.1	18.5

(click on image to enlarge)

CBO's "Budget and Economic Outlook: Fiscal Years 2008 to 2017," published yesterday, projects the federal budget deficit to fall from $248 to $172 billion this year, to be replaced by a $170 billion surplus in 2012. This forecast of a sudden surge into the black might be credible, "but virtually nobody ... believes it, says the Washington Post.

As we have said, the President's announced goal of balancing the federal budget by 2012 is a ploy at best. CBO's "offical" projections make the President's goal look like slacker's work, but legislatively mandated assumptions force CBO to formulate distortive baseline projections. Here are the three major caveats to the CBO projections:

• war spending: the CBO figures assume spending on war operations in Iraq and Afghanistan will not exceed $70 billion a year -- even though president is expected to send Congress a supplemental war request of about $100 billion next month (CPBB)

• AMT relief: the CBO must base its assumption on existing law, which provides for vast increases in revenues from the Alternative Minimum Tax (AMT) -- and permanent fix for the AMT, at the top of the Congressional taxwriters' agenda, could cost up to $1 trillion over 10 years (CPBB)

• extending the Bush 2001 and 2003 tax cuts: few believe that Congress will permit the bulk of these cuts to expire -- and extending the 2001 and 2003 tax cuts would cost over $250 billion in 2012 alone and $400 billion over 2008-2012 (CQ/$$)

These mandated assumptions leave us with numbers which are of questionable value for policymakers trying to convey and cope with the nation's actual fiscal trajectory.

Fortunately, the CBO's 173-page budget outlook includes a chart titled "Budgetary Effects of Selected Policy Alternatives Not Included in CBO's Baseline" that offers budget projections reflecting political reality. But these alternatives don't yield bottom-lines and Post and Times headlines.

In case you missed it this morning, OMB Watch released a statement responding to the president's State of the Union address last night. In short, we were unimpressed with Bush's empty rhetoric about fiscal responsibility and balanced budgets.

Bush's Fiscal Policy Rhetoric Continues to Fall Short

Posted by Adam Hughes, 07:16:09 PM



Senate Detours En Route to the Minimum Wage

The Senate appears less eager than the House did to pass the minimum wage hike. Its deliberations on S.2, the Fair Minimum Wage Act of 2007, continued after this afternoon's votes on numerous amendments and a cloture vote. Two things are now clear:

1) S. 2 will not survive in the Senate without Finance chair Max Baucus' $8.3 billion small business tax cut package attached to it. A 54-43 cloture vote,six votes short of the needed 60, on the minimum wage on a stand-alone basis means it can't pass as is, despite the support of all Democratic Senators and Republicans Coleman (MN), Collins (ME), Snowe (ME), Specter (PA), and Warner (VA).

This may present problems down the road, since the House leadership continues to insist on its own "clean" minimum wage bill. However, Baucus could hold the amended S.2 at the Senate desk pending a House resolution, which would prevent Ways and Means chair Charlie Rangel from using the "blue slip" process to block the appointment of conferees on the bill.

2) The Gregg Amendment will rear its head again, as the Senate also rejected, 49-48, a cloture motion on his line-item veto amendment. Democratic Sens. Lieberman (CT) and Bayh (IN) and Republican Shelby (AL) were the only defectors in an otherwise party-line vote.

As mentioned here, Gregg sought to have the amendment attached to the Senate's ethics and lobbying bill last week and, in a press conference after the vote, Sen. Trent Lott (R-MS) indicated that the amendment would come up again at least once more later in the session, perhaps to make the GOP out like vanguards of fiscal responsibility -- now that they don't control Congress.

Ben Bernanke gave testimony on increasing entitlement program costs today. There was one key point I wanted to discuss:

Addressing the country's fiscal problems will take persistence and a willingness to make difficult choices. In the end, the fundamental decision that the Congress, the Administration, and the American people must confront is how large a share of the nation's economic resources to devote to federal government programs, including transfer programs such as Social Security, Medicare, and Medicaid.

I think the most fundamental decision is different. This country needs to make a decision about how it wants to organize the social insurance system. Do we want the public/private hybrid we have now, or something more like the public/private hybrid that almost all other industrialized countries have?

The foreign model tends to be much cheaper (not to mention more generous and inclusive). They're organized better.

Social insurance in this country is really, really expensive. We should talk about how to organize ours better.

Jacob Hacker's proposal gets us started in that direction. Why not talk about it as a way to keep down costs?

We can fix this long-term fiscal imbalance, but it's going to take something that goes much deeper than the decision Bernanke claims is most fundamental. We need to reorganize, step by step, the way social insurance is provided in this country. It would be nice if Bernanke at least acknowledged that this was an option.

Sen. Max Baucus (D-MT) wants to attach an $8 billion small business tax cut provision to a Senate minimum wage hike bill, because, as he claims, a "clean" minimum wage bill would not sustain a Republican filibuster.

Baucus may be playing smart politics in making an honest effort to pass good policy, or he could be simply be playing politics in staying true to his tax-cutting inner-self . In either case, what is clear is that PAYGO is doing the work that its advocates said it would: Preventing Congress from digging the Treasury deeper into the deficit hole. Not only is Baucus's "sweetener" revenue neutral, but the offsets in it make the tax code a little bit more progressive. Here are a few highlights with their respective revenues:

• Limitation of a tax shelter known as SILO (sale-in, lease-out): $4.1 billion
• $1 million ceiling on deferred income: $800 million
• Punitive damages no longer deductible: $299 million
• Certain fines and penalties no longer deductible: $244 million
• Increases in certain criminal penalties: $5 million

While we would have preferred to see a clean minimum wage bill, PAYGO has enabled revenue-neutral filibuster and veto protection while mildly increasing the progressivity of the tax code.

While we await his State of the Union speech and the Bush budget for FY2008, the media focus remains fixed, oddly, on the President's pledge last week that, despite his profligate past, he will balance the federal budget by 2012.

As we and others have suggested, this pledge shouldn't be taken seriously.

A Washington Post article today on the topic asserts that "the politically perilous work of making that happen -- cutting spending or raising taxes -- falls to the Democratic-run Congress."

But why should this Congress take the President's budget seriously either? In recent years, Bush has submitted budgets with proposed spending cuts that the GOP-controlled Congress refused to support. And Bush may have in mind accomplishing his goal by once again putting off much of the hard work of cutting spending and raising revenue until after he leaves office.

Even conservative analysts such as Chris Edwards, tax director at the Cato Institute, are skeptical:

I get the impression they're trying to beef up his reputation for fiscal responsibility, not by doing heavy lifting and actually targeting programs like farm subsidies, but through rhetoric and projections and changes in rules and things that are easy for a president to propose.

GAO Chief David M. Walker plays budget Cassandra in a report to the Senate Budget Committee today. You can read the report here

We commend to readers today's National Journal article by Stan Collender entitled "Budget Debate Gets Off to a Bad Start," which succintly reprises the charade involved in President Bush's pledge last week to balance the federal budget by 2012. It is reproduced in full below:

The FY08 debate got off to the worst possible start last week when President Bush announced he was going to balance the budget by 2012. Pledging to balance the federal budget in five years is a tried-and-true White House public relations ploy. That is the case here as well: The short-term deficit likely will be rising, with the FY07 and FY08 deficits higher than what occurred in FY06.

Sebastian Mallaby expresses some sensible thoughts on Sen. Max Baucus’s (D-MT) recent declaration of his desire to repeal the alternative minimum tax (AMT):

[A] prescription so fiscally crazy that not even the Bush administration supports it.

Indeed. Mallaby goes on to suggest a permanent AMT fix - in whatever form it may take - could be used as a chip to sweeten any future revenue-generation package, and Baucaus would be wasting this opportunity.

But, more importantly, Mallaby also makes the case that a repeal of the AMT is highly undesirable for two very important reasons:

• It would be extremely expensive - "$750 billion-plus over a decade" and
• The AMT is a progressive tax which is particularly warranted because "in an era of rising inequality, you don't slay progressive monsters casually."

As we’ve argued before, the AMT does need a few adjustments to restore it to being an equitable part of a tax code riddled with so many loopholes and exceptions that sometimes millionaires pay little or no federal income tax at all, but full repeal is simply indefensible.

“Bush Says Plan Would Balance Budget by ’12,” an article in yesterday's New York Times, includes this sorry sentence: “During his re-election campaign in 2004, Mr. Bush promised to cut the deficit in half by 2009. Though the prediction was greeted with widespread skepticism, that goal now looks increasingly plausible.”

Indeed, that prediction was met with widespread skepticism, but not because it seemed implausible. As we have noted, President Bush and OMB inflate deficit forecasts in order to claim victory when actual deficit numbers turn out to be smaller.

In 2004, President Bush created an artificial projected deficit figure for 2005 of $521 billion and then promised to cut that in half by 2009. In 2005, the president projected a $426 billion deficit; it turned out to be $318 billion. Those numbers in 2006 were, respectively, $423 billion and $248 billion — $175 billion off, OMB’s worst prediction in 21 years… but less than half of $521 billion!

Sadly and more significantly, the statement in the Times belies the nation's true fiscal condition. In today's Washington Post, this from Heritage Foundation analyst Brian M. Riedl:

With the cost of Social Security, Medicare and Medicaid on the rise, Riedl said he projects the annual deficit will grow to $750 billion in 10 years. "The reduced deficit of the last two years looks more like a short-term blip than a long-term trend," he said.

President Bush has fired the opening shot of the 2007 budget battle, writing an op-ed in today's WSJ. The piece is mostly PR, which is an encouraging sign that the President is more interested in repairing his image than pursuing harmful policy. Substance-wise, the President is not asking for much more than the continuation of the status quo.

Some notable budgetary policies and goals mentioned in the op-ed:

• No new taxes:
  "Now is not the time to raise taxes on the American people."
• A balanced budget by 2012:
  "By continuing these policies, we can balance the federal budget by 2012 while funding our priorities and making the tax cuts permanent. In early February, I will submit a budget that does exactly that."
• An vague reference to entitlement cuts as a way to balance the budget:
  "By balancing the budget through pro-growth economic policies and spending restraint, we are better positioned to tackle the longer term fiscal challenge facing our country: reforming entitlements -- Social Security, Medicare and Medicaid -- so future generations can benefit from these vital programs without bankrupting our country."
• Legislative process changes and a line-item veto:
  "It's time Congress give the president a line-item veto. And today I will announce my own proposal to end this dead-of-the-night process and substantially cut the earmarks passed each year."