Tax plan increases deficit, group says

With a deal announced between the Obama administration and Congressional Republicans to extend the Bush-era tax cuts for everyone, including the nation's most wealthy, and to extend unemployment insurance for millions of out-of-work Americans, at least one organization concerned with the nation's finances is reminding everyone that such bargains are no bargain for the burgeoning national debt.

This feels more than a bit surreal, said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. On the heels of the work of the White House Fiscal Commission last week on how to get control of the national debt, the White House and Members of Congress choose to engage in a negotiation that involves adding increasingly larger amounts to the debt? It's utterly exasperating.

CRFB, which has on its board such economics heavyweights as David Stockman, Pete Peterson, Alice Rivlin, Paul Volcker and Paul O'Neill, approved of the recommendations made last week by the bipartisan Presidential commission on handling the national debt and deficit spending.

The national debt is the total accumulated amount of money the nation's owes. The U.S. national debt is currently at $13.8 trillion, which breaks down to over $44,000 per U.S. citizen and over $125,000 per U.S. taxpayer.

The deficit is how much the nation spends beyond what it earns in a given year. This year's deficit is $1.3 trillion. Each year's deficit adds to the national debt.

The commission's plan would reduce the national debt by $4 trillion by 2020, by cutting discretionary spending and eliminating tax breaks. It would eliminate earmarks, cut farm subsidies, freeze the defense budget and eliminate 200,000 federal jobs by attrition.

The plan would also gradually raise the Social Security retirement age to 68 by 2050 and 70 by 2075. The plans also proposes cuts to Medicare and Medicaid.

Under this proposal, in 2020, the budget deficit would be down to $382 billion, and by 2037 the budget would be balanced. In the following years, the U.S. would produce surpluses - that is, more coming in than going out - and those funds would go to reduce the debt.

MacGuineas called it a great plan because it would get the nation back on the path to fiscal responsibility. But the debt commission failed to get supermajority approval of the plan from 14 of its 18 members, which approval would have given the plan the status of a legislative bill that Congress would have to treat accordingly.

Debt commissioners and others, including the CRFB, said the plan could still be very useful as a basis for Congress to devise a way to begin to dig the nation out from under its enormous fiscal avalanche.

But after Washington's sober moment of considering the debt commission's proposals, the parties have gone right back to adding to the deficit through the tax extension/UI extension compromise.

The CRFB today called upon lawmakers to incorporate a serious longer-term deficit reduction plan into the package.

The deal struck by the administration and Republican leadership must still be approved by both houses of Congress. Lawmakers are expected to take up the proposal soon.

The deal would extend the Bush tax cuts for two years, patch the Alternative Minimum Tax for two years, extend unemployment benefits for 13 months, reinstate the estate tax at lower levels, cut the Social Security payroll tax by 2 percentage points next year, and provide for various other tax breaks.

News accounts have estimated the total cost of the package between $600 and $900 billion over two years, MacGuineas said.

The CRFB said that lawmakers appear to have little intention of offsetting the costs of this massive package, portions of which are exempt from pay-as-you-go requirements, and some of which likely will be declared emergency costs.

There is probably a legitimate case to be made that the economy needs more stimulus now. But this bill is far from an ideal stimulus package, which would maximize the bang for the buck, said MacGuineas.

Moreover, the critical objective is to pair any stimulus for the short-term with a credible plan to reduce the debt in the medium- and long-term, she said. It would only make sense to pair this package with serious policies to reduce the debt over the rest of the decade. We should be talking about what triggers to attach, how to pay for this new package over the decade, and what additional spending cuts and tax reforms to make. Instead lawmakers are tripping over themselves to add more deficit-financed measures to the bill.