How “bracket creep” (the good kind) could make the long-term fiscal outlook better than everyone thinks.
You might wonder why the CBO didn’t take this revenue into account in its long-run projections. And the answer is, it did—but almost no one paid attention. The CBO reflected this long-run revenue growth under its “current law” projection, which, at the time, also featured the Bush tax cuts entirely expiring and the Alternative Minimum Tax immediately exploding. That projection was dismissed as unrealistic—rightly, as it turns out.
Most reporters and other consumers of budget projections have focused on the CBO’s much darker “alternative fiscal scenario.” That scenario assumes a full extension of the tax cuts and a fix for the Alternative Minimum Tax (not too far off from what actually happened). It also freezes revenues as a share of the economy after ten years, which means that it doesn’t take into account the revenue growth that would naturally occur, even with all of these tax cuts extended. In other words, this scenario essentially dismisses provisions like the Obamacare “Cadillac” tax, which remains, at this point, a viable policy.
The issue here is not just of accurately sizing America’s long-term deficits—though that is certainly important. It is also a question of strategy. Even if policymakers manage to slow the growth of health care costs—the biggest driver of our long-term budget shortfalls—and to close the Social Security shortfall (a smaller but still real problem), the federal government is likely to need much more revenue over the long run. And the recent tough fight to achieve even a relatively small tax increase suggests what a battle that will be.
Stabilizing the fiscal trajectory over the next few years will require going back to the negotiating table and trying to agree on new tax increases and spending cuts. But these adjustments are small compared to what’s needed in the decades to come. Much of the fiscal fight is a long game, and in the long game it’s possible that the country will be able to rely on tax provisions that phase in only gradually.
Of course, Congress might eventually choose to turn these provisions off, especially in the absence of any widespread political commitment to their implementation. That’s what happened in the days before the tax brackets were indexed and in the face of high inflation. But as it stands, these gradual, revenue-boosting provisions are already law, and it can be much easier to get Congress to sit on its hands than to actually vote through a new tax increase.
In short, the fate of these relatively little-discussed provisions—whether they are defended and strengthened or abandoned—may be a key to our long-term fiscal future. With them in place, our fiscal future may not be rosy, but it could be a whole lot brighter than most people now think.
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