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Financial Planning > Tax Planning

CBO Challenges Republicans on Tax Increases

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Republicans have drawn a line in the sand when it comes to tax cuts, but new analysis by the CBO casts doubt on whether Congress’ bold deficit reduction agenda can succeed without concessions from the Right on their raison d’être.

Speaking before the congressional deficit reduction committee on Sept. 13, Congressional Budget Office Director Douglas Elmendorf testified that the Bush tax cuts must be allowed to expire if government spending continues at its current rate. As health-care costs grow—due both to an aging population and President Barack Obama’s expansive health care initiatives—spending in other areas will need to be cut dramatically if the Bush tax cuts are to remain in their current form.

“If current policies are continued in coming years, the aging of the population and the rising cost of health care will boost federal spending, as a share of the economy, well above the amount of revenues that the federal government has collected in the past,” Elmendorf said.

But Elmendorf acknowledged that deficit reduction is made all the more challenging by the current economic slump and poor employment numbers. “Changes that might be made to federal spending or tax policies could have a substantial impact on the pace of economic recovery during the next few years as well as on the nation’s output and people’s income over the longer term,” he said.

Despite Republican promises to stand firm on the Bush tax cuts, it’s hard to imagine how they can be extended without corresponding gargantuan spending cuts. The likely compromise will extend the Bush tax cuts at the lower end of the income scale and allow them to expire for families making more than some threshold amount at or above $250,000.

From his early debates with Sen. John McCain, R-Ariz., through today, Obama has called for rescission of the tax cuts for families making over $250,000. But there’s little chance that Obama’s tax agenda will make it through Congress untouched. A compromise eliminating or reducing the tax cuts for taxpayers with annual incomes above $500,000 or $1 million would be much more likely to get bipartisan support.

At the end of last year, some Democrats expressed willingness to move the cutoff for the tax cuts to $500,000 and some Republicans said they would consider a compromise at $1 million. Of course, those positions were outliers. Many Democrats are stuck at $250,000, while Tea Party Republicans are married to an unconditional extension of all Bush tax cuts.

What’s clear is that something has to give—government benefits or tax cuts. “Citizens will either have to pay more for their government, accept less in government services and benefits, or both,” according to Elmendorf.

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See also The Law Professor’s blog at AdvisorFYI.


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