WSJ agitprop on CBO report

In an editorial today (subscription required), our friends at the Wall Street Journal make a series of mendacious claims about the new CBO report, which notes a surge in revenue in this fiscal year:

[T]his windfall means that tax revenue as a share of the economy is climbing back to normal levels. As the nearby chart shows, at 17.5% of GDP this year, Uncle Sam's tax take is close to the 17.9% postwar average. And CBO estimates that as the economy continues to grow, the tax take will slowly rise throughout this decade to 17.8%.

This is because more Americans are thrown into higher tax brackets as their incomes rise. Economists call this "real bracket creep," and what it means is that most taxpayers will see their tax burdens gradually rise even under the lower Bush rates of 2003. The burden will be that much higher still if the lower Bush rates are allowed to expire after 2008 (on dividends and capital gains) and 2010 (on income taxes).

The CBO estimates above are also featured in this graphic, which accompanied the editorial:

But that graphic cuts off at 2010, and the CBO estimates it presents do not include the costs of extending the tax cuts that expire in 2008 and 2010. Yet the Journal writes that "The burden will be that much higher still if the lower Bush rates are allowed to expire after 2008 (on dividends and capital gains) and 2010 (on income taxes)" -- a statement that implies that the actual tax burden would be higher than the CBO estimates, rather than lower as will actually be the case.

This is obvious when you look at the CBO report, which lays out the costs of extending the expiring tax cuts and reforming the alternative minimum tax cut. If you reduce projected revenues accordingly (taking into account increased debt service), the Journal's chart looks strikingly optimistic:

In fact, revenue would decline back below 17 percent of GDP -- a level that, before Bush, hadn't been reached since the Eisenhower administration (PDF).

The WSJ continues:

A second fact you won't see in many other newspapers is that the federal budget deficit has also declined to close to its modern average. CBO says the deficit will fall to 2.7% of national output in the fiscal year that ends at the end of next month. It is expected to continue to fall to 2.4% of GDP next year and 2.0% in 2010, even if the Bush tax rates stay in place.

But the situation worsens dramatically over time if AMT reform and tax cut extensions are enacted, as the Journal's own reporters showed (subscription required) -- take a look at the graphic that ran with their story:

You can see that the Journal's 2010 date is cherrypicked -- the effects of extending President Bush's tax cuts are modest in that year, but explode over the next five.

Once again, the lesson here is simple: never trust the Wall Street Journal editorial page.

(Also see my blog posts and Spinsanity's articles on the WSJ editorial page.)

Comments

[Jeff II]

Question: Does the new CBO data include the additional allocations for the war in Iraq? If not, then the CBO figures put way too happy a face on the current budget woes.

[Smithers]

WSJ distorting the truth? I can't believe it...

[Trustor]

WSJ is not the only publication distorting the truth at times. Every one does it, intentionally or not. Who can we trust then? Brendan? He's not infallible. How do we know the truth? Reading other distorting articles? I am at a loss.

[Shelby]

The WSJ editorial does not address AMT reform; it's disingenuous to blame the paper for distorting the impact of a potential change that it never even discussed. And most AMT reform proposals I've seen greatly outweigh the fiscal impact of the tax cuts, at least when you're talking a few years down the road; thus the more alarming scenario you raise is using different postulates whose results should differ radically. You're bashing a straw man.

Furthermore, why not limit the forecast to 2010? It's not as though revenue or growth forecasts usually work well beyond that point anyway. Anyone else remember the eternal-deficit projections of the mid-90s?

[Pocket Rocket]

Has Bush ever even suggested reforming thr AMT? If he has, I can't recall it.

[Terry Ott]

Pocket Rocket: I wondered the same thing, and found this at www.marketwatch.com----

Headline: Tax panel leans toward AMT repeal

By William L. Watts, MarketWatch
Last Update: 3:15 PM ET July 20, 2005
WASHINGTON (MarketWatch) - Members of President Bush's advisory panel on tax reform largely agree that the individual alternative minimum tax, or AMT, should be fully repealed the committee's chairman said Wednesday.

"I think the obvious consensus was on the AMT on the individual side. We didn't end up with a consensus on the corporate side, even though I think it's fair to say that I think all panel members felt the corporate AMT was really not an effective way to tax," Chairman Connie Mack, a former Republican senator from Florida, told reporters after a public meeting of the committee.

The AMT is a parallel tax system created in 1969; it was enacted after it was revealed that a handful of extremely wealthy Americans paid no income tax. But thresholds for the AMT were never indexed for inflation. As a result, it has encompassed or threatened a growing number of middle-income taxpayers over the years. Lawmakers and administrations have responded by temporarily pushing up the threshold, but have yet to come up with a complete fix.

It's also become a substantial revenue source. Full repeal would reduce revenues by more than a trillion dollars over 10 years.

During the panel discussion, committee member Bill Frenzel said he agreed that it was time to "bite the bullet" and press for full repeal, but warned that doing so will put a "huge burden" on the panel to find a way to make up the lost revenues.

The panel's vice chairman, former Democratic Sen. John Breaux, said that while he's not a fan of the AMT, the panel must examine whether the full repeal of the system would allow some of the nation's highest earners to get away with paying no tax at all.

Mack replied that if that were the case, the committee would have to make adjustments in order to maintain roughly the same tax burden on the upper quintile of earners that is now in place.

The panel members agreed that changes to the corporate AMT would best be tackled as part of a broad corporate tax reform, Mack noted.

The committee, formally known as the President's Advisory Panel on Federal Tax Reform, must present the Treasury Department with a set of tax-reform proposals in September.

Bush has set a number of ground rules for the panel, however. The proposals must be revenue-neutral. Also, future tax measures can't touch the code's most sacred cows -- mortgage interest deduction and charitable giving.

[Brendan Nyhan]

Per Shelby's comment above, AMT reform is hardly a straw man; everyone agrees it should be done (though there are disagreements about how to do so). Pretending it's not a factor is disingenuous. Also, cutting off projections at 2010 leads to highly misleading inferences, since the full cost of the Bush tax cut doesn't kick in until the years afterward. Finally, as the article Terry posted notes, it is true that Bush has instructed his panel to consider revenue-neutral AMT fixes (see my post on this), so it's possible that the revenue situation could be somewhat better than what I describe above. But the larger point holds no matter what -- the naive CBO forecast of increased revenue is highly misleading given the plans of the President and the GOP Congress.

[Shelby]

Brendan,

I never said AMT reform is itself a straw man; it's long overdue. My point is that the CBO forecasts were predicated in part on AMT reform, but the WSJ's analysis was not. Then you based the WSJ because its figures differ from some of the CBO figures. Well, if the CBO uses an assumption that the WSJ does not, you'd expect different results, no?

[mds]

Well, if the CBO uses an assumption that the WSJ does not, you'd expect different results, no?

So, one analysis comes from a nonpartisan arm of the government, taking into account stated goals of policymakers, and the other analysis comes from a highly partisan editorial staff, and ignores any rumblings about the AMT because it would give them a result they don't want. So let's give them equal weight, and just say opinions differ. Even better, I've got an analysis that has the Super Magic Happy Fun Fairy laying an enormous golden egg that eliminates the deficit entirely. If the CBO refuses to use this assumption, you'd expect different results, no?

Oh, and the egg will disappear in 2010. Given this, I see no reason not to limit the forecast to 2009.