It’s Hard to Worry About a Deficit 10 Years Out

Ten years ago, Washington was worried about the budget outlook, and there were forecasts of dire outcomes. And so it is today.

The difference is the nature of the worries. Alan Greenspan, then the Federal Reserve chairman, talked about the dangers of a shortage of Treasury securities as the $5 trillion surplus forecast for the next decade enabled the national debt to be paid down. This week we were warned of a $9 trillion deficit over the next 10 years.

“The last time people got really excited about a 10-year budget outlook, they were hysterically wrong about what transpired,” said Robert Barbera, the chief economist of ITG, who mocked the surplus forecasts then and now thinks the consensus outlook is too negative.

“The $5 trillion surplus was a ‘nothing can go wrong’ forecast,” he said. “No recessions, no wars, no bear markets and a perpetuation of inexplicably high tax receipts. You can make the case that the current conversations about our fiscal outlook are effectively, ‘Nothing can go right.’ The estimates assume we continue to allocate over $100 billion a year for fighting wars. They assume a very mild recovery for the economy, and an even milder recovery for tax receipts.”

It was easier a decade ago to know the forecast was foolish, although few did. The assumption that politicians would refrain from cutting taxes or raising spending in the face of large surpluses had no historical support.

On the other hand, the notion that politicians will point fingers and do nothing as deficits mount has plenty of historical support.

One unusual factor now is that everyone agrees Congress must pass a new tax law. If it does not, taxes on nearly everyone will soar under an absurd plan enacted in 2001 called the snap-back tax, which provides that in 2011 the tax law that had been in effect in 2000 will reappear.

That would drive tax rates up sharply for most people, which might reduce budget deficits. But it is hardly what anyone wants if the economy is not booming by then.

Most of the tax changes being mulled can await Congressional action until next year. Under the snap-back tax plan, however, the estate tax is set to vanish for a year if nothing happens before the end of 2009, just over four months from now.

Heirs of a very rich person who died on Dec. 31, 2010, would get everything, without any estate tax. If that person died a day later, his or her estate would owe 55 percent of everything over $1 million. (I call that the Dr. Kevorkian provision, after the physician who specialized in assisted suicides until he was sent to prison.) How will hospitals respond if heirs demand that life support be ended before the clock strikes 12?

It would have been nice to fix that up in a nonelection year, but the health care debate has consumed Congress. The chairman of one tax-writing committee, Senator Max Baucus, is still trying to shape a bipartisan health care bill, a Sisyphean task that may not leave much time for taxes. The other chairman, Representative Charles Rangel, has just discovered that he forgot to mention a checking account with more than $250,000 in it when he listed his assets. Tax policy may not be on the top of his to-do list either, at least while the dual investigations of his ethics are continuing.

The country got into the current tax mess because George W. Bush wanted it all in 2001. He could overcome procedural hurdles in the Senate and make the 10-year cost of his tax cut appear lower, if the entire bill was labeled temporary. So it was.

To make things worse, that bill did nothing about the alternative minimum tax, which was supposed to catch wealthy citizens with big deductions and force them to pay something. By not lowering the A.M.T. rates when ordinary tax rates were cut, the law negated the cuts for millions of middle-class people. Now Congress passes a temporary fix every year to keep that from happening. President Obama wants to make that fix permanent, something Mr. Bush was hesitant to do because it would have made deficit forecasts look worse.

When Congress does get around to tax law, the political calculations could be fun to watch. Read the numbers one way, and President Obama’s proposals call for big increases in taxes on every group. Read them another way, they call for tax cuts for every group except the most prosperous one-tenth of 1 percent of Americans. Guess which interpretation the Republicans, and the Democrats, will choose.

The numbers to back each interpretation come from a new study by the Urban-Brookings Tax Policy Center, estimating effective federal tax rates using both current law and President Obama’s legislative proposals. The figures include all federal taxes, allocating corporate taxes to the owners of those companies and payroll taxes to the employees. Middle-income people tend to pay higher payroll taxes than the rich, because there is no Social Security tax on high incomes. The poorest are exempt from income tax, but do pay payroll taxes if they earn money.

In 2009, the average effective rate for all Americans is estimated to be 18.2 percent. The center estimates that if there are no changes in the law, that will rise to 23.4 percent in 2012. If the president’s proposals are all adopted, the figure that year will be 20.7 percent, with increases from 2009 for every group — those with the lowest incomes as well as those with the highest. How can that be, given that the president has promised to raise taxes only on those who make at least $250,000 a year?

Roberton Williams, a senior fellow at the Tax Policy Center, points to two reasons. First, Mr. Obama does not want to continue some special tax breaks, like a tax credit for new homeowners, that were part of the stimulus package he pushed through Congress. More important, the 2012 estimates assume a better economy, in which incomes will be higher and more people will therefore be in higher tax brackets.
By FLOYD NORRIS