Tax Challenges for the Next President
The ghost of David Stockman still haunts us. It was Mr. Stockman, Ronald Reagan's budget chief, who proclaimed 27 years ago: "I'm just not going to spend a lot of political capital solving some other guy's problem in 2010." That other guy -- or gal -- will be the next president of the United States.</br></br>To be sure, in many ways the federal budget is in better shape today than it was in Mr. Stockman's day. As a share of the economy, federal outlays and receipts were smaller last year than in fiscal year 1982. Because outlays fell more than receipts, the federal budget deficit amounted to only 1.2% of GDP last year, down from 4% in 1982. In fact, if the economy grows as projected and Congress maintains current tax laws and spending policies, the Congressional Budget Office (CBO) projects a federal budget surplus by 2012.</br></br>That's the good news. Nevertheless, our next president will encounter three ticking tax bombs in the weeks following the inauguration, as he or she prepares the budget for fiscal year 2010. Should even one of them detonate, we all will suffer the consequences.</br></br>The first ticking bomb is the fate of the Bush tax cuts. CBO's optimistic federal budget surplus projection is based on the assumption that Congress will allow the president's tax cuts to expire as scheduled at the end of 2010. That would trigger the largest tax increase in history (nearly $1.9 trillion over seven years), raising taxes on 115 million taxpayers, and returning to the tax rolls 7.8 million low- and middle-income families who now pay no federal income tax because of the Bush tax cuts.</br></br>If this bomb explodes, one thing is certain: It will damage the economy. The Institute for Research on the Economics of Taxation estimates the tax hike would, in the short run, oblige the economy to "flirt with recession" or worse.