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The Crazy Baseline Fight

There's a really strange fight brewing between the Obama administration and Republicans over which baseline the supercommittee should use to measure its deficit proposals. The baseline is the comparison the Congressional Budget Office uses to figure out how much a policy change saves. Republicans say the baseline needs to be "current law."

Why does that matter? Current law says that the Bush tax cuts expire. All the bipartisan commissions that came up with deficit plans that lose tax revenue compared with current law. That is, they set tax levels that would bring in less tax revenue than if all the Bush tax cuts expire at the end of 2012, but more revenue than if we extended all of them. The essence of the bipartisan agreements is setting revenue somewhere in the midpoint of those two outcomes (full extension and full expiration.) That's the way to arrive at a Grand Bargain.

Still with me? Okay.

Conservative Republicans don't want a Grand Bargain, because that would entail agreeing to phase out at least some of the Bush tax cuts, which as everybody knows constitute one of the most successful policy interventions in U.S. -- nay, world -- history. So locking in the current law baseline means that any tax bargain like that would be scored as a tax cut -- saving only some of the Bush tax cuts would cost the government revenue against the baseline of letting all the Bush tax cuts expire. So conservatives like Paul Ryan are insisting that that the supercommittee tasked with coming up with deficit reduction is required to follow the current law baseline. Former GOP staffer Keith Hennessey agrees with Ryan. Gene Sperling disagrees.

I don't really know who's right about the technical merits. In general, I think that if both parties wanted to strike a tax deal that scored a tax reform that lost revenue compared with current law as saving money, they would do it. The CBO works for Congress, not vice versa.

But the reason this is all so strange is that I hope the Republicans are right. If the supercommittee uses current law as a baseline, then it can't lock in any of the Bush tax cuts. Before the debt ceiling deal, Obama kept trying to get Republicans to agree to a tax reform that would lock in more than $3 trillion of the Bush tax cuts, foregoing only about $800 billion in revenue. That's no more revenue than Obama would get if he simply vetoes extension of the tax cuts on income over $250,000. (And if Obama isn't around in 2013, it won't matter what deal he cuts, because the next Republican president is going to cut taxes.)

Under the Republican interpretation, the supercommittee can still raise revenue. It could close tax loopholes without dealing with the Bush tax cuts. That means any revenue it gets would be on top of the revenue from expiring the Bush tax cuts. In other words, it's a way better situation for Democrats.

This is why I said that this debate is so strange. Each party seems to be arguing against its own interest.

Now, why are Republicans arguing this? Because they're absolutists. They don't want to agree to something that increases taxes, even if that would merely take the place of a tax hike that's scheduled to occur anyway. In other words, they're binding themselves from taking some version of the wildly generous offer Obama kept trying to give them.

But why the administration would be fighting this is rather disturbing. Obviously, it wants to try again to give away the tax store and get Republicans to take it. Yet it seems perfectly obvious that they won't. Republicans view the Bush tax cuts as a sacred totem. So, why not just try to pitch them on closing a few tax loopholes in return for some entitlement trims?