Deficit, economy complicate president’s budget proposals

McClatchy Newspapers

WASHINGTON — With the clock ticking toward a massive, automatic tax increase at the end of this year, President Barack Obama on Monday will launch a political battle over who will pay higher taxes and who won’t.

Without action, all the Bush-era tax cuts that were enacted in 2001 and 2003 will expire Dec. 31.

The $1,000-per-child tax credit will drop to $500 per child. Income-tax rates will increase for all taxpayers. All taxes on capital gains, dividends and estates will rise.

With his budget proposal Monday, Obama will urge Congress to extend all of the Bush-era tax cuts for those who make less than $250,000 a year and to end those cuts for everyone who makes more than that, as he promised in his campaign.

Yet times have changed radically since he first vowed the tax changes.

Now, soaring federal-budget deficits make the prospect of adding trillions more to the debt to sustain the tax cuts more perilous to the economy — and politically.

Anxiety over what so far is a jobless recovery from the worst recession since the Great Depression is driving even some of Obama’s fellow Democrats to say that any tax increase now — even on the wealthy — could choke off a wobbly recovery.

Thus, the results of the coming debate will determine not just how much people pay in taxes next year, but also could have an outsized impact on the federal budget and the economy for years to come.

The first challenge is to make the tax cuts permanent for those who make less than $250,000. Normally a politically easy thing to do — and it likely will remain so this year — the move nonetheless would add to the already soaring federal deficit and could put a drag on the economy later.

Extending those cuts — along with another fix to the Alternative Minimum Tax to make sure those people don’t get socked with a tax increase — would add as much as $3 trillion to the deficit over the next 10 years, according to figures from the Office of Management and Budget, as well as the Concord Coalition, an independent, bipartisan anti-deficit group.

At the same time, it’s unlikely that the government will offset the lost tax revenues with spending cuts. The Senate on Thursday voted for new budget rules requiring that any new tax cuts or spending increases be paid for with offsetting tax increases or spending cuts to ensure that deficits don’t rise — but specifically exempted the cost of making the Bush-era middle-class tax cuts permanent.

Maintaining the tax cuts without any way to replace the revenue to the government and no offsetting cuts in spending would force the government to borrow more, likely from China and other foreign countries. That could drive up interest rates, crowd out other federal spending or force tax increases.

“We’re mortgaging part of our future and mortgaging future income,” said Robert Bixby, the director of the Concord Coalition. “We’ll be doing less investing, which means slower growth long-term.”

Obama faces other challenges in his quest to let the tax cuts expire for everyone who makes more than $250,000.

He’s promised that ever since his campaign. With Americans still looking for a robust rebound from a staggering recession, however, many Republicans and some Democrats fear that the tax increase on the wealthy would inhibit a recovery.

“Allowing the 2001 and 2003 tax rates to expire at the end of 2010 before our economy fully recovers may significantly hinder job growth,” said Rep. Michael McMahon, D-N.Y., in a draft letter to Obama he is circulating among other members of the House of Representatives.

“There is a certain logic to leaving well-enough alone for now, given the fragility of the economic recovery,” said Rep. Gerry Connolly, D-Va. “It’s a question of prudent judgment and timing.”