Diary of a Financier

Obama Extends Bush Tax-Cuts: Where’s the PAYGO Offset?

In Politics on Tue 7 Dec 2010 at 10:29


  • White House announces “framework” for extension of Bush tax-cuts.
  • Constitutionally, a PAYGO offset must balance the opportunity cost of the cuts.

Last night, Barack Obama announced the two-year extension of Bush tax cuts across the board; the middle class, higher income brackets, estates, corporations, unemployment extensions…

Bloomberg neatly quotes:

The compromise amounts to a couple hundred billion in tax cuts that no one thought possible just days ago, the official said…

I would echo that sentiment.  I sat on a “2011 Outlook” roundtable in October with two lobbyists to DC (one on my firm’s corporate payroll, the other represented a local asset manager) and ten other regional advisors.  Both lobbyists were naturally fighting to maintain tax cuts, and in October, both had already conceded their battle to minimize the damage to $250k+ AGI earners.  They cited PAYGO as the mechanism making such cuts ‘politically, economically, Constitutionally & mathematically unfeasible,’ so they noted.  ‘We’re focusing our efforts on the Estate tax, capital gains/investment income taxes, and the middle class.’

However, that roundtable transpired before the November elections, which proved a resounding disapproval of the Democrats’ governance.  Now, I voted for Mr. Obama in 2008, but the news from the White House later in November (“Obama considering tax cut extensions”) was undoubtedly a populist gambit dressed as a non-partisan compromise.  At the heart of the matter, this deal gets done because the Washington brain-trust fears a relapse a la Hoover’s 1932 enacted tax increase, an attempt to balance the budget which apparently cast the American economy back into Depression.

I’m fine with the maintenance of Bush’s tax-cuts: it helps me, my clients, the economy’s present consumption… but Constitutionally, the tax-cuts must be offset.  Congress is constrained by a mechanism called PAYGO, enacted as part of the Budget Enforcement Act of 1990.  What is PAYGO?

PAYGO required all increases in direct spending or revenue decreases to be offset by other spending decreases or revenue increases. It was thought that this would control increases in deficit spending.

Ahahahahaha, “control increases in deficit spending,” that’s rich!  This is even richer:

Congress can, however, waive PAYGO for a particular bill with the support of 60 senators and the majority of the House.

Wuhahahahaha!  See, for example, Congress’ sidestepping PAYGO in 2007 to ease taxpayer burdens associated with AMT; or in 2008 for the Economic Stimulus Act; or later in 2008 ‘upon consideration of the 2007 US Farm Bill.’  At this point Congress was just playing Calvinball with itself.


Empirically, PAYGO seems to work–if for nothing else–to keep government spending honest.  It expired briefly in 2002, reinstated in 2007, in which time the federal deficit swung from a $236B surplus in 2000 to a deficit of $157B in 2002, an so on.

So pray, do tell from where the PAYGO offset comes? The Pragmatic Capitalist did the back-of-the-envelope-math to widdle this gross $900B package down to a net cost (“stimulus”) of $270B.  I’ll use that figure as the PAYGO shortfall, and I expect to hear how it will be covered.  In fairness, Mr. Obama announced this as a “framework,” so I’ll be watching.

At the end of the day, my concern is that policy like this is enacted out of fear–as in the fear of Hoover-ishly relapsing into a Great Depression.  I’ll quote Barry Ritzholtz here, “Focus on the next crisis–not the last one.”  If stimulus the economy needs, stimulus the economy receives… but make that stimulus efficient & targeted, not general like this.  More to come on this notion, but I hope someone consulted Moodys/S&P/Fitch.




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