Oops, Our Bad

Have you ever wondered how Washington can set out to make tax policy — starting with the best possible information and most up-to-date projections — and get it so completely wrong?

Last month, the Congressional Budget Office (CBO) released an eye-opening report on changes in baseline projections for the past 10 years. CBO states that "those projections are not intended as a forecast of future outcomes; rather, they are estimates of spending and revenues under the laws that are in effect at that time and are designed to provide a benchmark against which to measure future policy changes." In other words, they start by estimating what will happen under current law — then report what really happens after a decade's worth of policy changes and economic reality. (Sounds grim already, right?)

CBO's budget geeks are good. Yes, they probably got more than their fair share of wedgies growing up. But they understand federal spending better than anyone else. And they realize the federal budget, like the US Constitution, is a "living document."

Ten years ago, former President Clinton was just leaving office. The federal budget showed a surplus of $230 billion, at least according to the particular mathematics that Washington calls "accounting." (Remember, private-sector accountants have done hard time for reporting numbers less inaccurate than the federal government's.) And CBO felt confident projecting that, under the current baseline, the period from 2002-2011 would show a cumulative surplus of $5.6 trillion.

So, how did the budget geeks do? Well, as the insurance commercials say, "life comes at you fast." Washington cut taxes, shrinking revenue by $2.8 trillion. We fought major wars in Iraq and Afghanistan, costing trillions more. The housing and credit bubbles burst, prompting billions in stimulus and relief spending. Soaring deficits cost us $1.375 trillion in unanticipated interest.

Bottom line? Instead of $5.6 trillion in cumulative surplus, we wound up with $6.2 billion in cumulative deficit. Ouch. That's an $11.8 trillion swing over just 10 years! It would be nice if someone in Washington would come out and say "oops . . . our bad" — but don't hold your breath waiting.

Right now, the looming debt ceiling and 2012 presidential race are forcing Washington into a crucial debate over getting out of this mess. Democrats generally advocate a combination of revenue enhancements (in plain English, "tax increases") and spending cuts. Republicans have embraced a plan to take serious aim at entitlement spending, but generally reject tax increases. Regardless of which path Washington ultimately takes, the new plan will be subject to the same "real world" adjustments that produced CBO's $11.8 trillion difference.

The good news is, you can take steps to minimize your contribution no matter how much Washington spends. Proactive tax planning is the first step, of course. But just as CBO adjusts their numbers in light of real-world experience, we have to monitor and adjust your plan in light of your real-world experience. Be sure to let us know how your finances change, so we can do the best job possible!