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Tax-cut plan digs deeper deficit hole

Despite warnings that the U.S. faces a risky surge in red ink, the deal cut by President Obama and the GOP would add to it.

December 08, 2010|By Don Lee, Los Angeles Times

Reporting from Washington — The tax-cut deal President Obama struck with congressional Republicans reflects an enduring political reality: Forced to choose, Washington's leaders kick long-term problems down the road.

Tax cuts: A Dec. 9 article in Section A about how the extension of tax cuts could affect the federal budget deficit said that temporary tax credits or deductions Congress often extends included mortgage interest. In fact, it is the deduction for mortgage insurance that is commonly extended. —

The agreement would add a staggering $700 billion to the federal budget deficit in the next two years alone, and the prospects for tax cuts and their negative consequences for the deficit could continue for years. Just last week, a bipartisan commission said that severe federal spending cutbacks were needed to avert a potentially dangerous surge in the deficit.

The Senate will launch the tax-cut debate and could begin voting this week, Majority Leader Harry Reid (D-Nev.) said Wednesday. Democrats remain uneasy about the deal and want an opportunity to amend it — a prospect that remains uncertain because changes could kill the agreement hammered out at the White House.

"There's still a lot of concern among a lot of Democrats," said Sen. Tom Harkin (D- Iowa).

Lawmakers are under pressure to act quickly. The Bush-era tax cuts expire at the end of the month, and some programs that extend unemployment benefits are ending during the month. The deal Obama announced Monday would not only continue tax cuts for two years but also fund those jobless programs through the end of next year.

For the second day in a row, administration officials, including Vice President Joe Biden, visited Capitol Hill to press the economic case for the tax package as Democrats met behind closed doors to assess their options.

"Failure to pass this bill in the next couple of weeks would materially increase the risk that the economy would stall out and we would have a double-dip" recession, warned Lawrence Summers, director of the National Economic Council.

But outside analysts were skeptical about the long-term outlook.

"The 'compromise' shows that policymakers, for the most part, have almost no intention of actively pursuing fiscal austerity, in our view," economists at Bank of America Merrill Lynch said this week.

"Each side is basically getting what it wants. This may aid the recovery in the short term, but raises concerns over the nation's long-run fiscal sustainability," they said.

While supporters argued that the deficit-busting tax cuts were authorized only on a temporary basis, economists noted that it's common for dozens of special tax provisions to reach expiration dates every year, only to be quietly extended — sometimes at the behest of affected interest groups and sometimes because large segments of the public have come to expect them.

These include tax credits or deductions for research and development, mortgage interest and education expenses.

"It's absolutely a worry," said Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center. "If you just go by history, these things come up every year and Congress renews them every year."

Obama has said repeatedly that the country cannot afford to continue the Bush administration's income tax cuts for the wealthy, but in the end, the president agreed to keep those cuts going — as well as those for all Americans — for an additional two years.

In exchange, Republicans agreed to support a 13-month extension of aid for long-term unemployed workers and a one-year reduction in Social Security payroll taxes.

The cut in payroll tax deductions will cost the government $120 billion. It effectively translates into a 2% pay raise for most U.S. workers: A worker with a typical taxable income of $40,000 would take home $800 more over the course of the year.

The White House said the payroll tax cut wouldn't hurt the Social Security fund because the deal would provide a transfer of general revenue into the fund for the elderly. But that simply means the government will be moving money from the left hand to the right — money it gets only by deficit spending.

"It's all going to be put on the government credit card," Williams said.

Moreover, though touted as a one-year measure, the payroll tax cuts will come up for renewal as the 2012 presidential election campaign shifts into high gear.

"It's very hard to imagine either party [agreeing] to increase payroll taxes at the beginning of an election year," said Robert J. Shapiro, an economic advisor to President Clinton and chairman of consulting firm Sonecon Inc.

More likely, he said, the payroll tax would revert to the current 6.2% rate only gradually over a number of years.

As for renewing extended unemployment benefits when they expire next year, he said, "that'll be a fight."

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