The "do nothing" plan 

Ezra Klein points to the chart below as, “the graph that all budget discussions should start with.” I'm happy to oblige.

This graph, created by Austin Frakt, represents what the budget would look like under the Congressional Budget Office's projection of what would happen if we simply did nothing. In other words, if the national health care law was fully implemented, the Bush tax cuts at all income levels fully expired, and so on. Ezra calls the do nothing approach a “pretty good plan,” while noting he would support additional spending cuts and health care cost controls.

But the do nothing plan has a lot of problems. As you can see from the chart above, it anticipates revenue as a percentage of the economy from rising to over 30 percent. This would be a staggering level, blowing away the all-time record of 20.9 percent during the height of World War II. And the increase in taxes wouldn't just hammer the rich, but increasingly fall on the middle class.

As the underlying CBO long-term analysis (PDF) explains, a big reason for the increase in tax revenue (aside from the expiration of the Bush rates and imposition of the tax on high-value health care plans), is that inflation will mean that more Americans will be subjected to the alternative minimum tax and that the actual value of tax credits will decline, while growth in real income will mean more will be pushed into higher tax brackets. Originally devised in 1969 to tax 155 wealthy individuals who had not paid any taxes, because of inflation, without action, the AMT would have affected 9 percent of people this year and half of taxpayers by 2035.

Combining the changes to the AMT as well as the decline in the value of tax credits with the fact that more Americans will creep into higher tax brackets, CBO estimates:

(A) couple with two children, earning the median income of $94,900 in 2010 and filing a joint tax return, would pay about 3 percent of their income in individual income taxes under the extended baseline scenario (see Table 4-4). By 2035, under existing tax law, a similar couple with median income would pay 13 percent of their income in individual income taxes, an increase of 10 percentage points.

Keep in mind that this massive tax increase for middle class taxpayers is just for 2035, when taxes are projected to be 23 percent of GDP. Remember, the “do nothing” plan would eventually have to raise taxes rise to over 30 percent of GDP.

Of course, this is all theoretical, because in reality, this type of tax increase would hinder economic growth, making the budget numbers look substantially different in reality. The same CBO report said: “Raising revenues significantly relative to GDP (as under the extended-baseline scenario) would harm the economy through the impact on people’s decisions about how much to work and save.”

And CBO said that, “However, even with revenues rising to those levels (omitting the economic effects of such increases), the budget would still be out of balance over the long term under the extended-baseline scenario.

If Ezra wants this chart to be the start of the discussion, I'm all for it. That way, the argument would be framed around the fact that if we simply do nothing, middle class Americans would see their taxes rise dramatically, economic growth would be hindered, and even if that lower economic growth didn't have side effects, we still wouldn't achieve balance after 75 years.

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Staff Report

Staff Report

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A daily newspaper covering San Francisco, San Mateo County and serving Alameda, Marin and Santa Clara counties.
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