Accounting for Bush tax break for the wealthy and its expiration

“At this point, diligent readers of Wonkbook know the numbers: The Bush tax cuts have cost about $2 trillion since their passage, and will cost another $3.7 trillion if extended for another 10 years. And that's before you count interest on all the new debt that will rack up. But they have a hidden cost, too. They make it almost impossible for Republicans and Democrats to agree on what to do over the deficit.

The problem is that until the future of the tax cuts are decided, it's almost impossible to say what is and isn't a tax increase. Last night, for instance, the Supercommittee's Republicans offered a deal that included $300 billion in tax increases. Lori Montgomery reports that Republican aides called this a “significant concession.” But to Democrats, it looked like just another tax cut. The terms of the deal included permanently extending the Bush tax cuts. So the real math wasn't +$300 billion in taxes, but +$300 billion in taxes -$3.7 trillion in tax cuts. The net tax cut, then, is $3.4 trillion or so.

Of course, Democrats play this game too. They don't use the expiration of the Bush tax cuts as their baseline, even though that's what the law currently says will happen. They use the expiration of the high-income tax cuts as their baseline. So though President Obama's September budget proposal claimed to raise about $1.5 trillion in taxes, it was really raising the $800 billion from letting the tax cuts for the rich expire, another $750 billion in assorted other tax increases, but making the remaining $3 trillion of the Bush tax cuts permanent. Net effect on the budget? A $1.5 trillion tax cut.

The end result is that all these budget conversations are bedeviled by tax math that's anything but simple. First there's the question of what Republicans consider a tax increase, which is anything above the rates Americans are paying right now. That's how they can say their supercommittee proposal would raise taxes. Then there's what Democrats consider a tax increase, which is anything equal to or above letting the Bush tax cuts for income over $250,000 expire. That's how the White House can say their recent deficit-reduction plans increase taxes. Then there's what the Congressional Budget Office will score as increasing taxes and reducing the budget deficit, which is only a plan that increases taxes by more than the $3.7 trillion they're currently scheduled to increase when the Bush tax cuts theoretically expire in 2012. Just one more legacy of the Bush tax cuts, and the confused way Washington has dealt with them.”