Beware the Baseline Manipulator
Alex Brill | AEIdeas
Over at the Daily Caller, JD Foster recently took aim at an article I wrote about the impending expiration of major provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) on December 31, 2025. In that article, I make the point that, while TCJA did many good things, extending it would be quite costly. I argue that lawmakers should see the upcoming tax cliff as an opportunity for revenue-neutral tax reform that further broadens the tax base and keeps the best parts of TCJA. Instead of simply extending expiring provisions, I encourage lawmakers to “pursue TCJA 2.0”.
Foster objects. He argues that the standard by which tax cuts or increases should be determined in 2026 is relative to the tax burden in 2025. Keeping TCJA in place is, by his logic, free. It is not. Is Foster, the former chief economist at the Office of Management and Budget, intentionally misremembering how federal budget estimates work, or is he simply trying to prime lawmakers to ignore five decades of budgetary conventions and build support for larger future deficits?
When Congress considers tax legislation, it turns to the nonpartisan Joint Committee on Taxation (JCT) for a year-by-year budget estimate of the bill. JCT reports how the bill, if enacted into law, would change federal revenues compared to the scenario in which tax law does not change. As the JCT notes:
The starting point for a revenue estimate prepared by the Joint Committee staff is the Congressional Budget Office (“CBO”) 10-year projection of Federal receipts, referred to as the “revenue baseline.” The revenue baseline serves as the benchmark for measuring the effects of proposed tax law changes. The baseline assumes that present law remains unchanged during the 10-year budget period. Thus, the revenue baseline is an estimate of the Federal revenues that will be collected over the next 10 years in the absence of statutory changes.
Foster’s article pretends that a “current policy” baseline—that is, assume that everything that is law today will be law forever—is the norm. It is not.
Notably, the temporary nature of key provisions of the TCJA were quite intentional. To pass the TCJA with a simple majority in the Senate, lawmakers, utilizing the budget reconciliation process, had to ensure that it did not increase the deficit beyond the ten-year budget window. Likewise, the reconciliation process limited the revenue costs within that window to $1.5 trillion. Consequently, most individual income provisions and a few business tax provisions were crafted as merely temporary tax law changes. For context, had all individual income tax provisions been permanent when first enacted, the 10-year cost would have been about $300 billion greater over the budget window. Extending these provisions through 2034 will increase the federal debt by $4 trillion. Today, the projected debt-to-GDP ratio will rise from 99 percent of GDP today to 116 percent of GDP in 2034. $4 trillion in additional borrowing will push the debt-to-GDP ratio to 125 percent instead.
Foster’s framework may also incentivize federal spending sprees. Take, for example, the massive surge in federal spending during the COVID-19 pandemic, which included billions in new payments to households and businesses. By Foster’s logic, extending those payments into perpetuity would not be an increase in spending or an expansion of government. In other words, Foster’s framework suggests that when federal spending hit nearly 31 percent of GDP in 2020 (nearly 10 percentage points higher than the previous 10-year average), moderate and liberal lawmakers could have argued to sustain that spending because to do otherwise would be a spending cut. (Thankfully, Congress refused to adopt the Foster Framework and much of the pandemic-era surge in spending has since abated.)
President Biden embraced this very framework more than 30 times when taking credit for the drop in the deficit during his presidency. He has claimed that because the fiscal rescue efforts wound down after his inauguration (as intended because they were temporary policies), he can claim credit for the deficit improvement. Fact-checkers have rightly pointed out the flaw: CNN noted it. House Budget Committee Republicans noted it. The Washington Post’s headline read, “Biden’s misleading deficit claim earns him a Bottomless Pinocchio,” the Post’s most egregious category.
The reality is that President Biden’s policies made the deficit larger than it would have been absent his legislative achievements, but by building his case on a current policy baseline he was able to portray himself as fiscally responsible. Any attempt to cast the straight extension of TCJA as free is to do the same.
Read here.
